china marine transport - kim eng · 12/13/2013 · source: , maybank kim eng figure 5: earnings...

SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

Hong KongSector Report 13 December 2013

China Marine Transport Finally, It’s Our Turn….. Improvement in fundamentals. We initiate coverage of the China marine transportation sector with at OVERWEIGHT. We like ports and logistics the most, followed by bulk shipping. We are, however, negative on container shipping. Top BUYs: Sinotrans and China Shipping Development. Top SELL: CSCL. We expect overall industry fundamentals to improve markedly next year. Better developed country economies and China’s domestic consumption growth will drive ports and logistics volume; while a return to demand-supply balance for bulk shipping will drive higher rates. The only sector that will see continued weak demand-supply is container shipping.

Bulk shipping: light at the end of the tunnel. Despite recent share-price spikes, we believe bulk shipping stocks are still significantly under-owned. We project average BDI for 2014 to be 1,500, or a 25% increase YoY, driving a revival of their bottom lines. Our optimism is based on a projected 2.1ppt cut in oversupply next year, as supply growth slows sharply and demand growth thrives. The government’s policy to scrap aged vessels will also help to reduce supply pressure. In our view, there are significant upside risks for consensus forecasts; and turnaround in 1H14 earnings will provide catalysts to share prices.

Container shipping demons still there. Container shipping rates will remain under pressure in 2014 as oversupply persists. We estimate a heavy fleet growth of 6.3% in 2014, which is unlikely to be fully absorbed by our projected 5.1% demand growth. The launch of the P3 Network in mid-2014 will heighten the risk of escalating price competition given lower operating costs, dominant market share, and improvement in efficiency of the P3 members. The recent share price rally along with bulk shipping stocks is unjustified and 1H14 results will be a major disappointment.

Ports and logistics benefit from volume growth. We see ports and logistics companies as better plays in capturing the container volume rebound. An 8.3% growth in 2014F container throughput should support healthy earnings streams while avoiding exposure to shipping overcapacity. Growing domestic consumption and e-commerce is an added driver to logistics demand and volume momentum. Additionally, the increase in overseas exposure will add growth impetus to maturing China port portfolios and we expect these international projects to gradually enter their harvesting stage in the next two years.

Figure 1: Valuation summary Price Target Upside/ PER (x) P/B (x) ROE Share performance

Stock (HKD) Code Rec 12-12-2013 price (downside) FY13F FY14F FY13F FY14F FY14F 3M YTDSinotrans 598 HK BUY 2.38 3.27 37.4% 9.5 7.8 0.7 0.7 8.7% 13.9% 90.4%China Shipping Dev 1138 HK BUY 5.62 7.20 28.1% Loss 46.3 0.7 0.7 1.4% 26.3% 26.6%COSCO Pacific 1199 HK BUY 10.76 13.70 27.3% 13.9 11.7 0.9 0.9 7.3% -6.9% -2.5%China Merchants 144 HK BUY 28.10 33.35 18.6% 17.3 15.1 1.5 1.4 9.3% 3.7% 13.1%China COSCO 1919 HK SELL 3.81 3.20 -16.0% 42.1 Loss 1.2 1.4 -16.3% -2.3% 0.3%CSCL 2866 HK SELL 2.01 1.63 -18.9% Loss Loss 0.7 0.8 -8.3% -8.2% -9.9%Source: Maybank Kim Eng forecasts

Overweight (New)

Osbert TK TANG, CFA [email protected] (86) 21 5096 8370 Tracy LIU [email protected] (86) 21 5096 8367

13 December 2013 of 71

China Marine Transport Sector

Contents

Sector at a snapshot…. ............................................... 3

Finally, it’s our turn….. ................................................. 4

Bulk shipping: light at the end of the tunnel ................. 6

Container shipping demons still there ....................... 14

Ports and logistics: benefit from volume growth ........ 24

Sinotrans Limited (598 HK) ....................................... 30

China Shipping Dev (1138 HK) ................................. 36

COSCO Pacific (1199 HK) ........................................ 43

China Merchants Holdings (144 HK) ......................... 49

China COSCO (1919 HK) .......................................... 56

CSCL (2866 HK) ........................................................ 63



Sector at a snapshot….

Figure 2: Bulk shipping demand-supply gap

Source: Clarksons, Maybank Kim Eng

Figure 3: Container shipping demand-supply gap

Source: AXS-Alphaliner, Clarksons, Maybank Kim Eng

Figure 4: China container throughput growth

Source: www.portcontainer.cn, Maybank Kim Eng

Figure 5: Earnings outlook for China marine transport sector Recurring earnings YoY change

Company Currency 2013F 2014F 2015F 2013F 2014F 2015F Sinotrans CNYm 849.2 1,024.4 1,305.5 30.8% 20.6% 27.4%China Shipping Dev CNYm (1,353.1) 325.5 1,019.5 Loss N/A 213.2%COSCO Pacific USDm 281.0 333.9 386.4 (2.3%) 18.8% 15.7%China Merchants HKDm 3,653.4 4,279.0 4,905.0 46.8% 16.4% 14.6%China COSCO CNYm (7,236.9) (3,646.4) 1,347.7 Loss Loss N/ACSCL CNYm (1,494.3) (1,923.3) 764.3 Loss Loss N/ASource: Company data, Maybank Kim Eng

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m TEI Throughput (m TEU) YoY growth

2014 will be the first time bulk shipping demand-supply gap

returns to positive since 2007.

Despite a slight improvement, container shipping will still see

oversupply in 2014.

We think container throughput growth will pick up - ports and

logistics companies are best plays.

Solid recurring earnings growth for Sinotrans and good

turnaround for CSD; but CCO and CSCL will remain in the red.



Finally, it’s our turn…..

We initiative coverage of the China marine transportation sector with an OVERWEIGHT stance. We like ports and logistics the most, followed by bulk shipping. We, however, are negative on container shipping. Top BUYs: Sinotrans and China Shipping Development. Top SELL: CSCL. We expect overall industry fundamentals to improve markedly next year. Better developed country economies and China’s domestic consumption growth will drive ports and logistics volume; while a return to demand-supply balance for bulk shipping will drive higher rates. The only sector that will see continued weak demand-supply is container shipping. Other stocks on our BUY list include COSCO Pacific and China Merchants; and we rate China COSCO a SELL due to the disappointing earnings outlook for next year.

We have a positive outlook for the bulk shipping sector as we believe next year it will emerge from the persistent oversupply since 2008. Despite recent share-price spikes, we believe bulk shipping stocks are still significantly under-owned. Share prices of the Hong Kong-based bulk shipping stocks have fallen by an average of 68.8% since 2008 from the levels when the BDI hit its all-time high of 11,793. On the back of a projected 2.1ppt cut in oversupply next year, we forecast average BDI for 2014 will be 1,500, or a 25% increase YoY; and this will revive earnings of the bulk shipping companies. In our view, there are significant upside risks for consensus earnings forecasts for the bulk shipping sector and a turnaround in 1H14 earnings will be a catalyst to share prices.

Container shipping rates will, however, remain under pressure in 2014 as supply growth continues to outpace demand growth by a wide margin. We expect a heavy fleet growth of 6.3% in 2014, even after factoring in aggressive slippage and scrapping assumptions. Our projected demand growth of 5.1% for 2014 will be unable to fully absorb the capacity growth. Structurally, the launch of the P3 Network (Maersk, MSC and CMA CGM) in mid-FY14 may change the ecosystem given its dominating market share in the Asia-Europe trade. Due to their lower operating cost, higher average vessel size and increase in vessel deployment efficiency, we should not under-estimate the risk of another round of price competition. We believe earnings for container shipping companies will remain poor in FY14 as the industry has run out of solutions to resolve the oversupply problem. The recent share-price rally of the container shipping stocks along with bulk shipping stocks is unjustified as their underlying economics are different. In our view, the ugly 4Q13 and 1H14 results will be big disappointments.

In contrast to the container shipping companies, we see ports and logistics companies as better plays in capturing container volume rebound next year. Our projected 8.3% growth in container throughput in China in 2014 (up from 7.3% in 2013) will support a healthy earnings stream. The ports and logistics companies have the advantages of no overcapacity problem and lack of incentives for price competition. In the meantime, the rise in domestic consumption and e-commerce is an added driver to volume momentum. Structurally, the increase in the average size of container vessels will translate into a growing demand for transshipment, which is also positive to the port throughput. Over the past few years, Chinese port companies have increased investments overseas, and this should add a growth impetus to their increasingly mature China port portfolios and we expect these international projects to gradually enter their harvesting stage in the next two years.

In our view, the Chinese government now has a strong determination in resolving the structural problem of the domestic shipping industry. We believe further support from the government will create a better market environment for the China marine transportation sector in the next two years. The Ministry of

Positive on bulk, and ports and logistics, but negative on

container shipping.

Overall demand-supply situation is still unfavourable

for container shipping sector.

Ports and logistics companies are the best plays on a pick-up

in volume, in our view.



Transport (MoT) has pushed forward the development of the marine transportation industry in China to the State strategic level. The key focuses are: 1.) strengthening capacity management and simplifying approval processes; 2.) improving inner rivers and optimising port capabilities; 3.) retiring inefficient capacity and optimizing fleet structure; 4.) tightening supervision to remove unapproved operations; 5.) increasing the opening of the marine transportation market; 6.) monitoring of the marine market and enhancing market intelligence; 7.) encouraging the investment of financial institutions in shipping enterprises and developing cruise line and Ro-Ro sectors; and 8.) reducing various charges and fees for shipping enterprises.

In our view, the government’s policies will improve the macro-system of the Chinese shipping companies by reducing competition, expanding business scopes, removing excess capacity and lowering financial burdens. In the medium term, we expect the profitability for the Chinese shipping companies to benefit, although the global macro environment will remain the dominating factor in the near term.

Figure 6: Valuation summary Price Target Upside/ PER (x) P/B (x) ROE Share performance

Stock (HKD) Code Rec 12-12-2013 price (downside) FY13F FY14F FY13F FY14F FY14F 3M YTDSinotrans 598 HK BUY 2.38 3.27 37.4% 9.5 7.8 0.7 0.7 8.7% 13.9% 90.4%China Shipping Dev 1138 HK BUY 5.62 7.20 28.1% Loss 46.3 0.7 0.7 1.4% 26.3% 26.6%COSCO Pacific 1199 HK BUY 10.76 13.70 27.3% 13.9 11.7 0.9 0.9 7.3% -6.9% -2.5%China Merchants 144 HK BUY 28.10 33.35 18.6% 17.3 15.1 1.5 1.4 9.3% 3.7% 13.1%China COSCO 1919 HK SELL 3.81 3.20 -16.0% 42.1 Loss 1.2 1.4 -16.3% -2.3% 0.3%CSCL 2866 HK SELL 2.01 1.63 -18.9% Loss Loss 0.7 0.8 -8.3% -8.2% -9.9%Source: Maybank Kim Eng forecasts



Bulk shipping: light at the end of the tunnel

The outlook for the global dry bulk shipping market inevitably depends on China’s economic performance. We estimate China accounts for 39% of the global seaborne bulk cargo trade. After a slowdown in GDP growth to 7.6% in 2013 based on IMF forecast, we believe FAI will continue to be an important driver for economic growth. However, we do not expect an investment scale similar to the CNY4t stimulus package released in 2008. We think FAI continues to be important due to the uncertain outlook for external demand (export) and as growth in domestic consumption will still be restrained by inflation concerns. Premier Li Ke-qiang has said that the government will strengthen city infrastructure investments to improve residents’ quality of life. The areas of infrastructure investments include water supply, sewage management, gas pipeline, subway and light rail, city power grids and eco-environments. We selectively took these as examples of further FAI that will boost the economy.

Figure 7: China’s GDP growth

Source: NBSC, Maybank Kim Eng

China’s FAI is a major driver of demand for steel and construction materials. Steel demand, in turn, drives the ultimate demand for iron ore, which accounts for 28% of global seaborne bulk trade demand. In the 12th Five-Year Plan and under Premier Li’s governance, urbanization is an important focus of China’s development in the next five years. We believe the rise in urbanization will lead to escalated FAI, including railway, utility infrastructure and property development (particularly subsidized housing). As a result, the added demand for steel will translate into improvement in iron ore demand.

Figure 8: China’s share of global bulk cargo import

Source: Clarksons

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China is the dominating factor in driving global seaborne bulk

trade.



Figure 9: Breakdown of global seaborne bulk cargo trade

Source: Clarksons

While the government plans to eliminate surplus steel capacity in China, many of the inefficient capacities are located in inland provinces which mostly utilize lower quality domestic iron ore. That said, we believe the policy’s near-term impact on imported iron ore will be limited. Additionally, despite the strong local ore output, we expect differentials in pricing and quality will drive a growing demand for ore import; and this should reflect positively on bulk shipping demand.

China’s import of iron ore increased by only 3.1% HoH in 2H12, but the output of domestic iron ore rose by 22% HoH over the same period. Although domestic iron ore output displaced demand for imported iron ore in 2012, we noticed the gradual reversal of fortune this year. Domestic iron ore output increased 6.7% YoY in 10M13, but China’s import of iron ore has accelerated to 9.9% YoY in the same period. The big three global iron ore companies, namely Vale, BHP and Rio Tinto, have undertaken aggressive capacity expansion over the past several years to boost output. As a result, we expect the rise in capacity to drive a lower price for overseas ores and this should support a higher proportion of imports in China’s total iron ore mix. Additionally, the increase in China’s investment in overseas mines also means that there will be a rise in Chinese-owned ore being exported to China. All in all, we expect this structurally positive trend will boost the demand for bulk shipping, particularly that for Capesize vessels and VLOCs, which are primarily employed for ore transportation.

Figure 10: Iron ore import vs China’s steel output

Source: Bloomberg

Iron Ore28.3%

Coking Coal6.2%

Steam Coal19.9%

Grain8.4%

Minor Bulk37.2%

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Figure 11: China’s iron ore import by country

Source: Bloomberg

Figure 12: Global trade routes for iron ore

(m tons) Major iron ore exporters in 2012 Major iron ore importers in 2012 Australia 494 China 745Brazil 327 Japan 131CIS 50 EU 128South Africa 47 South Korea 66Canada 34 Taiwan 18India 23 Source: Banchero costa, Kim Eng Securities

Besides iron ore, another important contributor to bulk shipping demand is coal transportation. Over the past few months, we witnessed a recovery in thermal coal demand in China on the back of better electricity demand. The recent manufacturing PMI figures in China have pointed to a gradual recovery in manufacturing activities and this is positive to power and coal demand.

Additionally, a recovering US economy, as evidenced by the improvement in unemployment and non-farm payrolls and a stronger housing market, should mean better demand for Chinese products in 2014, in our view, and this should potentially drive a recovery in electricity consumption in China. Recent data showed an improvement in China’s electricity output growth to 6.9% YoY for 10M13, with the single-month growth at an impressive 10.5% YoY in October. We see China’s structural change to rely more on clean energy as a long-term threat to coal demand. Development of environmentally-friendly energy sources is one priority of China’s energy strategy under the 12th Five-Year Plan and Premier Li’s energy policy given the widespread concern on air pollution. While

Australia50.3%

Brazil18.7%

India1.4%

South Africa5.4%

Others24.2%

China imported 50% of its iron ore demand from Australia

Coal trade is another important bulk shipping driver.



environmental reasons will reduce the importance of coal in China’s total energy mix in the medium term, we think it will still be difficult to replace the importance of coal in the near term. To this end, demand for coal shipping should be benefited more by a cyclical recovery than dampened by a structural change, at least in the next two years, in our view. In fact, China’s coal import (mostly through seaborne) had surged to 288.85m tonnes in 2012, up 57.7% YoY from 183.22m tonnes in 2011; and coal import also advanced by 17.1% YoY in 10M13.

Figure 13: China power output vs coal import

Source: Bloomberg

Figure 14: Global trade routes for coal

(m tons, thermal+coking) (m tons, thermal+coking) Major coal exporters in 2012 Major coal importers in 2012 Indonesia 315+0 China 210+52Australia 171+145 EU 173+42Russia 110+16 Japan 133+53USA 50+63 South Korea 95+33Colombia 76+0 India 101+16South Africa 75+0 Taiwan 63+7Source: Banchero costa, Kim Eng Securities

We expect demand from coal shipping to improve next year. The impact of thermal coal trade on bulk shipping is significant as it accounts for 20% of global bulk shipping demand. While coal demand can support the near-term bulk shipping market, we believe it is difficult to rely on this commodity to fuel the long-term bulk shipping demand given the structural change for China to reduce its dependence on fossil fuel.

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Coal import increased along with the rebound in electricity

output

China is the largest coal importer as well.

Thermal coal trade accounts for 20% of global bulk shipping

demand.



Along with a steady demand outlook, the supply side picture for the bulk shipping market has turned more positive in the past two years. The outstanding orderbook has fallen significantly from two years ago. Currently, the bulk carrier orderbook stands at 19% of the existing fleet, which is the lowest level after the global financial crisis in 2008.

Figure 15: Global bulk vessel orderbook as a percentage of existing fleet

Source: Clarksons

The shipbuilding overcapacity in China will also lead to further closure of inefficient and sub-quality shipyards in the country, eliminating the surplus capacity of the industry. According to the State Council, capacity utilization of the shipbuilding industry in China reached only 75% at end-2012. Given such surplus, in October, the government has announced measures to reduce shipbuilding capacity. This should bode well for the future vessel supply when effective shipbuilding capacity is reduced.

Despite a slowdown in bulk vessel supply growth, we are currently still in the process of absorbing the excess capacity. As at the end of November, the global dry bulk fleet grew by 5.4% when compared with end-FY12 fleet. We expect the final fleet growth this year to be lower than schedule due to scrapping and slippage. Year-to-date, total scrapping of bulk shipping capacity reached 18.3m dwt, or 2.7% of the beginning-2013 fleet. Based on this trend, we expect the final growth in dry bulk fleet to be 6.4% in 2013.

Figure 16: Global bulk vessel scrapping

Source: Clarksons

According to the current outstanding orderbook, there will be 62.4m dwt of bulk carrier capacity scheduled to be delivered in 2014. So far, the delivery slippage for bulk vessels is high at an estimate of 40% in this year. We expect the trend of high slippage and scrapping to continue next year and this should contribute positively to the demand-supply balance.

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FY13.

2.7% of the global dry bulk fleet has been scrapped so far in this

year.



Figure 17: Bulk vessel delivery schedule by quarter

Source: Clarksons

Increasing government incentives to phase-out aged vessels will also lead to a slower bulk vessel capacity growth in the future, particularly for fleets that focus on coastal shipping. The MoT announced preliminary policy in early-September to encourage the phasing out of aged ocean-going and coastal capacity in 2013-2015. During such period, the Ministry of Finance and local finance bureaus will allocate annual subsidies to enterprises to encourage early retirement of aged vessels. The details of such subsidies were finally announced in early-December. The subsidies are for the phasing out of China-registered aged vessels (starting at an age of 25 years, depending on vessel type) and single-hull tankers at a level of CNY1,500 per gross tonne. We expect this to gradually improve the efficiency of China’s vessel fleet (we estimate up to 10% of China’s fleet is fit for scrapping) and improve the short-term supply picture. The MoT will also strictly administer the mandatory withdrawal of shipping capacity from the market once vessels have reached their official phase-out age. We believe these measures should serve as positive stimuli for the exit of inefficient and outdated shipping capacities, effectively reducing the supply in the market.

Figure 18: Outstanding bulk vessel orderbook breakdown

Source: Clarksons

Against these backdrops, we expect scrapping for next year will stay high. Assuming 30% of slippage and 2.3% of scrapping in 2014, we calculate that the eventual bulk fleet growth for next year will be at 3.8%, or a net new supply of 27.4m dwt. This has come down from the heavy 14% CAGR between 2009-12. Additionally, bulk cargo vessel congestion is at 4.4% of the global fleet currently, which is the lowest level in the past three years. In other words, there is limited capacity being held up in ports, suggesting insignificant supply pressure from the release of such congested capacity.

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Figure 19: Bulk vessel port congestion

Source: Clarksons

In the meantime, we forecast a healthy bulk cargo demand growth of 4.9% in next year. Our forecasts for seaborne iron ore and coal demand are with reference to the projections of steel output and coal demand by our regional Metals & Mining analyst Alexander Latzer. For further details, please refer to his report titled “Metals, Mining, Coal, Steel: More Excitement for This Space in 2014” published on Sep 25, 2013. Our demand-supply projections mean that the bulk shipping demand growth will outpace supply by 1.1ppt in 2014 and further increase to 1.3ppt in 2015. This is in contrast to an estimated oversupply of 1ppt in 2013F and 3.7ppt in 2012 and indicates a gradual return to demand-supply balance over the next two years.

Figure 20: Bulk shipping demand-supply balance 2011A 2012A 2013F 2014F 2015F

Demand m tonnes % Change m tonnes % Change m tonnes % Change m tonnes % Change m tonnes % ChangeIron Ore 1,052 6.2% 1,109 5.4% 1,186 6.9% 1,269 7.0% 1,352 6.5%Coking Coal 223 -5.1% 235 5.4% 266 13.2% 279 5.0% 293 5.0%Steam Coal 724 8.9% 827 14.2% 858 3.7% 897 4.5% 932 4.0%Grain 345 0.6% 370 7.2% 368 -0.5% 379 3.0% 390 3.0%Minor Bulk 1,484 9.1% 1,544 4.0% 1,626 5.3% 1,691 4.0% 1,776 5.0%Total tonnage trade 3,828 6.5% 4,085 6.7% 4,304 5.4% 4,515 4.9% 4,726 5.1%Overall demand growth 6.5% 6.7% 5.4% 4.9% 5.1%

2011A 2012A 2013F 2014F 2015F Supply m dwt % Change m dwt % Change m dwt % Change m dwt % Change m dwt % ChangeCapesize 249.5 19.8% 279.1 11.9% 295.0 5.7% 301.7 2.3% 316.6 4.9%Panamax 151.7 11.6% 169.9 12.0% 186.5 9.8% 196.0 5.1% 198.9 1.5%Handymax 130.3 19.7% 145.6 11.7% 156.7 7.6% 164.9 5.2% 172.1 4.4%Handysize 84.5 2.9% 85.4 1.1% 85.1 -0.4% 88.0 3.4% 91.4 3.9%Total tonnage 616.0 15.1% 680.0 10.4% 723.3 6.4% 750.7 3.8% 779.0 3.8%Overall supply growth 15.1% 10.4% 6.4% 3.8% 3.8%

Overall supply-demand balance

-8.6% -3.7% -1.0% 1.1% 1.3%

Source: Clarksons, Maybank Kim Eng

Even with a rebound in 4Q13, partly due to seasonal factors, the BDI for 2013 will still be dragged down by the weak performance in the first nine months of this year. We expect the BDI to average at 1,200 for the full-year 2013, representing a 30% YoY improvement when compared with an average of 920 for FY12. The current time-charter equivalent (TCE) rate of US$36,000/day for Capesize vessels should be more than enough to cover an estimated cash operating cost of US$10,000/day. However, the average rate of US$7,500/day in this year is still unable to make these ships profitable for the full year. As for 2014, our forecast calls for an average BDI of 1,500, or a 25% YoY increase, on the back of an improvement in demand-supply balance. In terms of rates, we expect Capesize and Handysize vessels, the largest and smallest classes of bulk vessels, to outperform Panamax and Handymax vessels in next year, thanks to better shipping demand-supply patterns for iron ore and minor bulks.

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Current bulk vessels congestion level of 4.4% is not

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We forecast the BDI to average at 1,500 for next year, a 25%

YoY growth.



Figure 21: YTD Baltic Dry Indices performance

Source: Bloomberg, Maybank Kim Eng forecast

The major Hong Kong-listed bulk shipping companies (including China COSCO (CCO), China Shipping Development (CSD), Pacific Basin Shipping and Sinotrans Shipping) are trading at an average P/B of 0.9x for FY14F, based on our and consensus forecasts. We think that valuations are no longer stretched after an average of 26.3% fall in share prices over the past three years. We rate CSD a BUY given a recovery in domestic coal freight rates, a portfolio of long-term contract customers, its unique exposure to transportation of imported LNG and its undemanding valuation. However, CCO is a SELL as its exposure to the container shipping business, through COSCO Container Lines (COSCON), will remain a drag on its bottom line.

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Valuations of Hong Kong-listed bulk shipping companies are no

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Container shipping demons still there

After a brief rebound in early 3Q13, the container shipping industry witnessed an anti-climax downturn in rates since August, which is traditionally the onset of the peak season. The liner companies successfully implemented another round of rate increase in November – Asia-Europe and Asia-Mediterranean on November 1 and transpacific on November 15. However, average spot freight rate, as reflected by the Shanghai Containerised Freight Index (SCFI), has decreased by 11% since then. In particular, it is disappointing to see the poor performance on the Asia-Europe and Asia-Mediterranean routes. In our view, this indicates a lacklustre demand situation and unsuccessful capacity control.

As for the transpacific rates, it also showed difficulties in sustaining the increase, as rates have retreated by an average of 8% since mid-November. With the erosion of rates, liner companies have already planned for another round of Asia-Europe and Asia-Mediterranean rate increase in mid-December at US$750/TEU. The Transpacific Stabilisation Agreement (TSA) also recommends a US$200/FEU rise in rate on 20 December and another US$300/FEU on 15 January for the transpacific routes. However, due to a forecast lack of cargo momentum during this usually low season, we think such proposed rate increases are unlikely to be successfully implemented. That said, we anticipate rates to continue their downtrend until early-January, which they may experience a short-term support from the pre-Chinese New Year cargo rush. However, this should not be able to change the adverse operating situation for the liner companies next year, in our view.

Figure 22: Shanghai Containerised Freight Indices

Source: Shanghai Shipping Exchange

Figure 23: Containership charter rates

Source: AXS-Alphaliner

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Spot container freight rates continued to fall after rate hike

in November.

Lacklustre container shipping rates in this year’s peak season.

Weak charter rates for containerships also suggest

unexciting outlook.



We believe 4Q13 and 1Q14 earnings will remain low due to forecast depressed freight rates and the traditional low season of the industry. We expect an upturn on rates in the middle of next year; however, we do not expect profitability can return to the levels seen in the previous cycles due to persistent oversupply. On the revenue front, the current freight rate for Asia-Europe and Asia-Mediterranean routes are both 3.3% lower than the average in 1H13. Meanwhile, at the cost front, bunker prices have remained elevated. As a result, we think it is difficult to see bunker expenses contribute to any meaningful improvement in liner profitability as fuel cost normally accounts for 30-35% of their total costs. Industry-wide, average profit margin has recovered from -11.9% in 1Q12 to 0.3% in 3Q13, based on data from AXS-Alphaliner. However, this is still well below the peak margin of 14.5% for the last cycle achieved in 3Q10.

Figure 24: Average container carrier operating profit margin by quarter


Container shipping demand has a direct positive correlation with global GDP growth. The IMF forecasts global GDP growth of 3.6% for 2014, an acceleration of 0.7ppt from its forecast growth of 2.9% for 2013. We believe an improved global growth momentum should be positive to container shipping demand. Based on Clarkson’s estimate, total container shipping demand increased by 3.2% in 2012. We forecast this to grow by a faster pace of 4.2% in 2013 and 5.1% in 2014 on the back of better global GDP growth. We project a pick-up in 2014 demand from developed countries, with reference to IMF’s forecasts for a 2.6% GDP growth for the US (vs 1.6% in 2013) and 1% growth for the Euro Area (vs -0.4% in 2013). For developing countries and intra-regional trade, we expect demand growth for 2014 will maintain the momentum in 2013. We, however, do not foresee acceleration due to high bases and a more moderate increase in GDP growth – IMF forecasts emerging market growth of 5.1% in 2014 (vs 4.5% in 2013).

Figure 25: IMF world GDP growth forecasts

Source: IMF

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Earnings are likely to be low for 4Q13 and 1Q14.

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2013.



Figure 26: Container shipping demand growth m TEU 2011 2012 2013F 2014F 2015FTranspacific 20.8 20.8 21.3 22.2 23.3% Change 2.5% 0.0% 2.5% 4.0% 5.0%Far East-Europe 20.4 19.9 20.3 21.2 22.7% Change 4.1% -2.5% 2.0% 4.5% 7.0%Transatlantic 6.0 6.2 6.3 6.4 6.5% Change 5.3% 3.3% 1.0% 2.0% 2.0%North-South 25.8 26.6 27.7 28.9 30.4% Change 10.3% 3.1% 4.0% 4.5% 5.0%Non-mainlane East-West 18.8 19.5 20.3 21.5 22.6% Change 11.2% 3.7% 4.0% 6.0% 5.0%Others 56.3 59.8 63.4 67.2 71.6% Change 7.9% 6.2% 6.0% 6.0% 6.5%Total volume 148.1 152.8 159.2 167.4 177.0% Change 7.2% 3.2% 4.2% 5.1% 5.7%Source: Clarkson, Maybank Kim Eng forecast

China’s export growth reached 10.4% YoY in 1H13 and the pace has improved slightly to 12.7% in November. Domestically, China’s manufacturing PMI continues to be in the expansionary zone (51.4 in November, unchanged from October), but the overall trend has been mediocre. The turnover achieved in the recent Autumn Canton Trade Fair is 10.9% lower than the Spring Trade Fair and 3% lower YoY. In our view, this indicates that the underlying manufacturing activities in China remain unpromising, although there are no sign of further significant deterioration either. We expect the government to announce more policy support measures to boost exports next year. That said, we believe the export outlook for next year may not be too weak.

Figure 27: China’s manufacturing PMI

Source: China Federation of Logistics & Purchasing

Figure 28: China’s manufacturing PMI - new order vs container throughput

Source: China Federation of Logistics & Purchasing, MoT

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China’s manufacturing PMI remains in the expansionary

zone.



The moderate growth in the US economy and the stabilization of the European economies should also limit further significant downside on demand. We observed that Eurozone retail sales have recorded a moderate YoY pick-up this year. In the US, various economic figures suggest that there is also gradual recovery in the employment situation and consumer sentiment; and these have reflected positively on the stabilization of US retail sales. We believe these figures all point to a revival of demand in the developed countries but we concede that the pace is sluggish.

Figure 29: Eurozone retail sales

Source: Bloomberg

Figure 30: US consumer sentiment index Figure 31: US unemployment rate

Source: Bloomberg Source: Bloomberg

Figure 32: US non-farm payroll Figure 33: US retail sales

Source: Bloomberg Source: Bloomberg

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In terms of the retail inventory ratio in the US, it has remained low in the past 12 months, although there were some marginal increases recently. Nonetheless, we do not see a significant increase in inventory stock-up after the massive cut in the retail inventory ratio following the global financial crisis in 2008. We do not see an imminent need for the retailers to return to the pre-crisis inventory level. That said, re-stocking looks unlikely to be a strong driver, although we agree that there is limited room for further inventory reductions. Summing up, we think the macroeconomic situation is supportive for better container shipping demand, albeit the recovery is expected to be a slow and prolonged one.

Figure 34: Retail inventory sales ratio

Source: Bloomberg

Even though we expect a moderate demand-side recovery for the next two years, it is the supply-side pressure that worries us the most. The current outstanding containership orderbook amounts to 3.6m TEUs, which equals to 21% of the existing capacity. It is true that the orderbook percentage is now at the lowest level since the global financial crisis (at its peak, the ratio stood at 65%). However, this cannot be interpreted that supply pressure will significantly receded for the next two years.

Figure 35: Containership orderbook as a percentage of existing fleet


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Figure 36: Containership orderbook breakdown by size


Based on the outstanding orderbook, a total of 1.7m TEUs of containership capacity is scheduled to be delivered in 2014, with 74% of them being post-Panamax vessels to be deployed on the long-haul trade lanes. For 2015, total scheduled delivery is 1.6m TEUs. According to our channel checks with shipyards in China, many ship owners are still negotiating to cancel orders and delay deliveries. Additionally, there are cases of shipyard bankruptcies which will continue to result in delivery slippage in 2014.

Figure 37: Containership delivery schedule by month


There is a high amount of containership scrapping this year, partly due to the delivery of super post-Panamax vessels which sped up the metabolism of the global containership fleet. In the first 10 months of 2013, a total of 367,484m TEUs of containerships were scrapped. After factoring in slippage and scrapping effects, we forecast global container shipping capacity to grow by an average of 6.3% YoY in 2014F, from 6.2% in 2013F.

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Figure 38: Containership scrapping trend

Source: Clarksons

It is now easy to come to a negative conclusion on the outlook for the container shipping industry based on our demand and supply projections. We expect the oversupply gap to be 1.2ppt in 2014, compared with 2ppt in 2013. This will mean continued freight rate pressure on the liner sector, especially for the long-haul routes, unless industry players take aggressive steps to cut surplus capacity. We had seen some successes in such capacity management over the past two quarters, but it is disappointing to see such discipline could not be sustained for long when the freight rate returned to profitable levels.

Figure 39: Container shipping demand-supply gap

Source: AXS-Alphaliner, Clarksons, Maybank Kim Eng

In view of the negative projected demand-supply balance and the weak profitability of the liner companies, we expect there will be more incentives to control capacity. Liner shipping companies have historically sought recourse by idling excess fleet and withdrawing services as strategies to reduce effective capacity. However, over the past 12 months, idle capacity has been fluctuating within a narrow band of 2.3-5.3% despite poor industry profitability. According to Alphaliner, the current idle fleet percentage is only 3.6%, which is well below the historical peak of 11%.

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Figure 40: Containership idle trend


We also think there is a reason for further capacity lay-up. We saw the steady increase in capacity withdrawal early this year, supported a good rebound in freight rates. As a result, there should be incentives for the liner operators to reemploy this strategy in a hope to boost freight rates. Meanwhile, many liner companies have already announced plans to cut capacity between October-2013 and early-2014. These include a cut of 5 Asia-Europe and 3 Asia-Med sailings at G6 Alliance, 2 Asia-Europe and 3 Asia-Med sailings at Maersk CMA CMG joint services and 2 Asia-Europe sailings at MSC CMA CMG joint services.

Figure 41: FE-Europe capacity share by carrier/alliance


Figure 42: FE-North America capacity share by carrier/alliance


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Alliance members have already commenced capacity cuts for

the winter season.



We have also seen more co-operations announced amid the adverse industry environment. For example, the commencement of operations of the P3 network involving Maersk, CMA CGM and Mediterranean Shipping Company (MSC) in 2Q14. These three companies are the top three liner operators globally and control a combined 36.6% of the world’s containership capacity. P3 will operate a capacity of 2.6m TEU (initially 255 vessels on 29 loops) on three trade lanes: Asia-Europe, transpacific and trans-Atlantic. Each of the lines will offer more weekly sailings in their combined network than they do individually and offer more direct ports of call. P3 intends to improve their efficiency through better utilization of vessel capacity after the establishment of an independent joint vessel operating centre. We calculate that average vessel size for the P3 alliance will reach 10,196TEU, significantly larger than the average vessel size of 4,495TEU for the remaining 17 liners in the top 20 list. The vast average vessel size of P3 will provide them strong unit cost advantage when compared with their peers.

Figure 43: Top 20 container liner companies in the world Total Owned Chartered Orderbook Rank Operator TEU Ships TEU Ships TEU Ships % Chartered TEU Ships % existing 1 APM-Maersk 2,619,921 583 1,424,345 245 1,195,576 338 45.6% 292,320 16 11.2%2 Mediterranean Shg Co 2,363,600 477 1,041,395 190 1,322,205 287 55.9% 466,429 41 19.7%3 CMA CGM Group 1,504,865 428 526,284 83 978,581 345 65.0% 240,580 24 16.0%4 Evergreen Line 835,694 202 458,655 102 377,039 100 45.1% 229,240 22 27.4%5 COSCON 785,234 169 423,758 106 361,476 63 46.0% 53,544 4 6.8%6 Hapag-Lloyd 735,543 153 384,367 64 351,176 89 47.7% 39,507 3 5.4%7 APL 646,432 124 312,600 44 333,832 80 51.6% 83,200 8 12.9%8 Hanjin Shipping 630,868 116 311,546 46 319,322 70 50.6% 78,200 9 12.4%9 CSCL 596,479 138 417,043 76 179,436 62 30.1% 172,000 13 28.8%10 MOL 550,896 112 214,722 35 336,174 77 61.0% 76,600 7 13.9%11 OOCL 467,808 89 312,065 46 155,743 43 33.3% 61,968 6 13.2%12 NYK Line 459,155 102 300,513 54 158,642 48 34.6% 0 0 0.0%13 Hamburg Süd Group 446,608 102 265,795 49 180,813 53 40.5% 142,894 17 32.0%14 Yang Ming Marine 388,231 91 233,755 48 154,476 43 39.8% 238,850 21 61.5%15 PIL (Pacific Int. Line) 373,073 174 245,319 114 127,754 60 34.2% 51,050 13 13.7%16 K Line 343,947 66 122,552 20 221,395 46 64.4% 69,350 5 20.2%17 Hyundai M.M. 335,485 58 100,646 17 234,839 41 70.0% 65,500 5 19.5%18 Zim 328,471 84 133,394 25 195,077 59 59.4% 85,408 8 26.0%19 UASC 277,152 50 198,164 26 78,988 24 28.5% 178,000 12 64.2%20 CSAV Group 263,169 53 79,426 15 183,743 38 69.8% 82,300 9 31.3%Source: AXS-Alphaliner

Figure 44: Capacity share of P3 Network Figure 45: Capacity share of G6

Source: AXS-Alphaliner Source: AXS-Alphaliner

Figure 46: Capacity share of CKYH Figure 47: Capacity share of other liner companies

Source: AXS-Alphaliner Source: AXS-Alphaliner

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Despite wide-spread slow-steaming of vessels amongst the liner operators, we see further room for slow-steaming of liner services. Many Asia-Europe routes, including some of those operated by Maersk and CMA CGM, are still cruising at speeds of over 20-knots. However, further reduction in speed is possible, in our view. For example, liner companies can save another 175 tonnes of bunker by sailing a 10,000TEU ship at between 18-20 knots instead of at 20-25 knots. The impact is even more significant for super-slow steaming, which means sailing at just 15-18 knots, as this will save an additional 100 tonnes of bunker a day. This amounts to a saving of US$0.6m a day at a bunker price of USD600/tonne.

Figure 48: Containership capacity absorbed by super/extra slow-steaming


Although these measures can support freight rates in the short term, this will not change the medium-term supply picture given the huge excess capacity in the system. It will be difficult for the liner sector to completely resolve the capacity glut in the next three years given the sizeable oversupply. We believe such persistent capacity surplus will mean a fluctuation of industry profitability around the breakeven line for staggered periods of time. As market freight rate return to above breakeven, idled and slowed capacities will enter the market and drive rates back to below costs. The reverse will happen when freight rates move to significantly below breakeven levels. As a result, the profitability cycle for the liner sector will shorten – with brief periods of profit followed by periods of loss.

After marginal QoQ improvement in 3Q13 bottomline, we expect another downturn in profitability in 4Q13 due to the retrenchment in freight rate. We expect 1Q14 profitability to remain depressed as the peak shopping season (Thanksgiving, Christmas and New Year) in the developed countries move behind us. In our view, an upturn in freight rate MAY start in late-1Q14 to early-2Q14, in line with the timing of the traditional onset of the peak season. The sustainability of such increase will, however, also depend on the strategy of P3, which will commence operations in May 2014. Given the large average vessel size of the P3 and the potential cost savings when their fleets are pooled and more coordinated, we will not rule out the possibility that it will kick-start another round of price competition during the peak season. After all, with P3’s lower operating cost and improved efficiency, it will have better pricing power when compared with other solo liner companies and smaller alliances.

That said, we think that a potential price war may eat into liner sector profitability next year. We recommend SELL on CSCL given its smaller bargaining power and more exposure to spot freight rate movement. Meanwhile, our SELL rating for CCO is more a reflection of concerns on its liner division, despite its better competitive position than CSCL due to its membership in the CKYH Alliance.

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Ports and logistics: benefit from volume growth

China’s container port throughput has a close correlation with OECD GDP growth, as most of the country’s container handling activities are related to exports to developed countries. Based on our calculation, over the past 15 years, China’s export growth averaged 3.75x of OECD GDP growth, with a high correlation coefficient of 0.77. With projections from OECD for a growth of 4.1% in GDP for its member countries in 2014, versus 2.6% in 2013F and 2.9% in 2012, we believe China’s container throughput growth will see better momentum next year.

Figure 49: OECD growth vs China container throughput

Source: OECD, MoT, Maybank Kim Eng

China’s total container throughput increased 7.3% YoY in 10M13, compared with a 7.6% YoY growth in 2012 (176.5m TEUs in FY12). For the top eight ports in China, aggregate growth for 3Q13 was 5.6% YoY, which is marginally slower than the 5.9% YoY growth in 2Q13. The weaker growth in 3Q13 was primarily due to slower momentum in September. Despite this, we think that with stabilizing PMI figures in both China and developed economies, throughput momentum is close to bottoming out in this cycle. In fact, with a projected improvement in global GDP growth, we expect a stronger YoY container throughput for 2014.

Figure 50: China top eight ports throughput growth in 10M13

Source: MoT

The Chinese government has increased its emphasis on boosting domestic consumption to support economic growth; and we expect domestic container throughput growth to accelerate as well. Moreover, with the movement of more manufacturing enterprises to inland and western China, we envisage container throughput growth to benefit from the rise in domestic transshipment. The MoT plans to ensure the average size of the vessel navigating on the Yangtze

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Waterway reaches 2,000dwt by 2020. In addition, China’s container throughput momentum will also benefit from the change in the global containership fleet structure. The increase in post-Panamax containerships will stimulate the demand of international and domestic transshipment, given that smaller ports cannot handle such mega-size vessels and that it is more economical for these vessels to only call major ports.

Figure 51: Trend of average containership size


Structurally, we also see an increase in containerization of bulk cargoes in China. This is an emerging trend that will stimulate container traffic. For example, we have already witnessed a rise in containerization coal trade in China. Average freight rate for containerized coal shipment from North China to South China is now at CNY5,000/TEU. In the meantime, containerized trade has also become increasingly popular for high-end bulk cargoes like grains, fruits and chemicals on backhaul trade from the US and Europe. For example, this trend has already led to an increase in backhaul load for some liner companies to 50-60%, from just 30-40% previously.

We continue to expect strong policy support from the government to promote China’s global trade volume. The Chinese government has reduced import tariff for an additional 780 cargo types this year. These cargoes cover selected infant formula milk, infant foods, environmental and energy-saving products and some agricultural supportive products. On the export front, the government will continue to use VAT rebates to support the manufacturing industry. Additionally, the government has encouraged banks to extend more lending to small and medium-sized enterprise (SME) manufacturers and supported companies exporting to emerging markets. In our view, all these policies are positive to import/export trade and will benefit the container shipping and port volume.

A more favourable currency move in 2014 will also provide an improved environment for Chinese exporters, in our view. We expect the renminbi to see a small appreciation in 2014. The Chinese currency appreciated by 1.2% in 2012 and by 2.5% in 2013 and we project the appreciation will be 1% for 2014. Over the past five years, the renminbi has appreciated by 17%, eroding the cost competitiveness of the Chinese manufacturers. In view of this, we believe a smaller magnitude of appreciation is positive towards the export manufacturers in China.

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Figure 52: CNY/USD exchange rate

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On these backdrops, we forecast China’s total container throughput to reach 205.2m TEUs in 2014, representing a YoY growth of 8.3% when compared with +7.3% YoY in 2013F. We expect a slight pick-up in the growth rate next year, primarily due to our expectation of a better export growth in 2014.

Figure 53: Container port throughput forecast m TEUs 2011 2012 2013F 2014F 2015F 2011 2012 2013F 2014F 2015FShanghai 31.7 32.5 33.7 35.0 36.6 9.5% 2.5% 3.5% 4.0% 4.5%Shenzhen 22.6 22.9 23.0 23.4 24.2 0.9% 1.6% 0.1% 2.0% 3.5%Guangzhou 14.2 14.7 15.3 16.1 16.9 13.8% 3.6% 4.0% 5.0% 5.0%Ningbo-Zhoushan 14.7 16.2 17.3 18.7 20.2 12.8% 9.7% 7.0% 8.0% 8.0%Qingdao 13.0 14.5 15.8 17.1 18.6 8.4% 11.4% 8.7% 8.5% 9.0%Tianjin 11.6 12.3 13.0 14.1 15.3 14.9% 6.2% 6.0% 8.0% 9.0%Xiamen 6.5 7.2 8.1 9.1 10.2 11.1% 11.5% 13.0% 12.0% 12.0%Dalian 6.4 8.1 9.9 11.7 13.5 22.4% 26.0% 23.0% 18.0% 15.0%Total top 8 ports 120.7 128.4 136.1 145.2 155.6 9.7% 6.4% 6.0% 6.7% 7.1%Others 43.3 48.1 53.3 60.0 67.5 19.1% 11.1% 11.0% 12.5% 12.5%Total China ports 164.0 176.5 189.5 205.2 223.1 12.0% 7.6% 7.3% 8.3% 8.7%Source: www.portcontainer.cn, Maybank Kim Eng forecast

Geographically, we continue to forecast a stronger throughput momentum in North China than East and South China. However, with a recovery of export projected for 2014, there will be potentially YoY improvement in container throughput for Shanghai and Shenzhen. Hence, we project the unfavourable gap for container throughput growth in East and South China against North China may narrow down.

Figure 54: Regional breakdown of container throughput in FY13F


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Pearl River Delta29.3%

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Taiwan Strait Area5.6%

We forecast container throughput to grow 8.3% YoY in

2014.



Figure 55: Throughput growth for regional clusters


In the long term, we think the potential for re-acceleration of growth in South China should not be overlooked, particularly for Shenzhen. The development of Qianhaiwan in western Shenzhen may mean a special opportunity for manufacturers and hence port operators. The establishment of the China (Shanghai) Pilot Free Trade Zone provides a good example for Shenzhen. The Shanghai FTZ was officially set up on 1 Oct 2013. The government has made it significantly easier to set up companies in the FTZ and simplifies the procedures for international trade. There are also liberalization policies in place for various industries to conduct businesses in the FTZ.

After the establishment of the Shanghai FTZ, we see the development of similar FTZs in the Bohai Bay Rim and Pearl River Delta as near-term possibilities. We believe a successful establishment of such FTZ will benefit trade and throughput growth in southern China. Container throughput growth for Shenzhen has underperformed the national container throughput growth by an average of 6.7ppts since 2008 and we think the magnitude of underperformance is likely to narrow when the development of Qianhaiwan and a Pearl River Delta FTZ gathers momentum. Overall, we like both China Merchants (CM) and COSCO Pacific (CP) and expect these two port stocks to perform well under the improving macro-environment and benefit from structural demand growth and initiate coverage with a BUY rating.

Figure 56: Regional container throughput as a percentage of overall China


While China’s logistics demand grows hand-in-hand with export growth, it is also increasingly linked to domestic consumption. We expect China’s logistics market to continue to record strong growth over the next few years. Based on figures from China Federation of Logistics & Purchasing, total social logistics value of China reached CNY177.3t in 2012, or equivalent to a growth of 9.8% YoY. This

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FTZ and Qianhaiwan developments are positive for

the port companies.



happens to be faster than the port throughput growth in the same period. Momentum for the first 10 months of this year maintained a steady pace of 9.6% YoY, which is in line with the growth rate last year with only a marginal slowdown.

We believe the increase in affluence of Chinese people and the rise in popularity of B2C e-commerce will continue to be the drivers for China’s logistics demand. There is significant further market potential for the development of third-party logistics (3PL) given that many industrial companies are still handling their own logistics arrangements internally. The logistics sector in China is highly fragmented, as we estimate there are a total of over 15,000 companies registered as logistics services providers. However, many of these companies are only involved in basic transportation services and lack the capability and expertise in providing quality value-added services such as supply-chain management.

Figure 57: Growth in China’s total social logistics value

Source: China Federation of Logistics & Purchasing

According to a report by the China E-commerce Research Center, China’s total retail e-commerce sales had reached CNY1.32t in 2012, or equivalent to an impressive growth of 64.7% YoY. As at end-2012, there were 247m e-commerce consumers in China, up 21.7% YoY from 203m at end-2011. The report projects that total retail e-commerce sales in China will increase to CNY1.82t, or another 37.5% YoY growth, in 2013. Based on this research, total retail e-commerce value had reached 6.3% of the total consumer goods sales in China in 2012, up from just 4.4% in 2011. This is forecast to further rise to 7.4% in 2013, or an increase of 1.1ppt this year. We think this will form the backbone for driving the development of the logistics market in China, creating room for the expansion of 3PL players.

Figure 58: China’s e-commerce sales growth

Source: CECRC

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logistics companies.



We also see good growth potential in specialized logistics demand. These include chemical, engineering, project and convention logistics, for example. Geographically, logistics enterprises in China have experienced rapid overseas expansion as well. Many of the logistics providers have followed large state-owned enterprises, like China Railway and China Railway Construction, for example, in their expansion overseas. They have established long-lasting relationship with these Chinese enterprises and as these companies step up their overseas presences, the Chinese logistics companies become a natural selection for them. We view geographical expansion as another major source of growth for the Chinese logistics companies in the next five years. In this regard, we think Sinotrans will see the best benefit, its 3PL profit surged by c50% YoY in 1H13 to account for 26% of its total profit, and we rate the stock a BUY.

Sinotrans witnessed a 50% growth in 3PL profit in 1H13.


Hong KongInitiating Coverage 13 December 2013

Sinotrans Limited Roaring On An Uphill; Initiate BUY

Poised for solid growth; Initiate BUY on under-researhed name. Sinotrans will see excellent earnings growth of 20.6% and 27.4% in the next two years. We believe the key drivers are a solid momentum of third-party logistics (3PL), a turnaround at marine transportation, growth in express division and steady storage/warehouse business. An added catalyst will be the potential asset consolidation with its parent company Sinotrans & CSC Group.

3PL a rising growth engine. 3PL profit represents 26% of its 1H13 profit and has increased c50% YoY. Given that this business is included in the freight forwarding division, we think this is a hidden gem of the company. We expect 3PL growth momentum will continue at 20-30% in the next two years, thanks to the improvement in its supply chain design knowhow and excellent intermodal logistics execution capability. Overseas expansion is also a rising star as it generates business from providing logistics services to China enterprises expanding globally.

Marine transportation to turn around. We expect lower charter costs and more efficiency fleet deployment to support a turnaround at the loss-making marine transportation business. After a 71% HoH and 74% YoY reduction in losses in 1H13, we expect losses to trim by 77.5% YoY in full-year FY13. This will turn around to a profit of CNY7m in FY14. As earnings contribution is small and the business is volatile, Sinotrans may consider exiting this business and, if concluded, we think the resultant improvement in earnings stability and quality will warrant the stock a higher rating.

Deeply undervalued. In our view, Sinotrans remains deeply undervalued despite its 50.6% rally in the last six months. The stock is cheap at 7.8x, relative to the average sector PER of 17.5x for FY14F. Its strong financial position with net cash of CNY515m for FY14F also ranked it the most comfortable one amongst the transport companies under our coverage. We initiate BUY with a target price of HKD3.27, based on its 12-month forward sum-of-the-parts value.

Sinotrans – Summary Earnings Table FYE Dec (CNYm) 2012 2013F 2014F 2015FRevenue 47,603.2 52,616.2 57,111.5 62,331.7EBITDA 1,904.4 2,133.2 2,387.7 2,802.8Recurring Net Profit 649.4 849.2 1,024.4 1,305.5Recurring Basic EPS (CNY) 0.2 0.2 0.2 0.3EPS growth(%) 1.07 30.77 20.62 27.45DPS (CNY) 0.02 0.06 0.07 0.09PER 12.6 9.5 7.8 6.1 EV/EBITDA (x) 5.0 4.5 4.1 3.3 Div Yield(%) 1.0 3.1 3.8 4.9 P/BV(x) 0.8 0.7 0.7 0.6 Gearing (%) (6.7) (5.4) (4.4) (6.4)ROE (%) 6.3 7.7 8.7 10.3ROA(%) 2.2 3.0 3.4 4.2Consensus Net Profit 805.0 1,006.0 1,134.0Source: Company data, Maybank Kim Eng

Buy (initiation)

Share price: HKD2.38 Target price: HKD3.27


Stock Information

Description: Sinotrans is a leading provider of logistic services in China. Core services include freight forwarding, express services and shipping agency, while its supporting services comprise storage and terminal services, marine transportation and other services. Ticker: 598 HK Shares Issued (m): 4,249 Market Cap (USDm): 1,304 3-mth Avg Daily Turnover (USDm): 2.6 HSI: 23,218.1 Free Float (%): 42.07 Major Shareholders: % Sinotrans & CSC Holdings 57.93 Key Indicators

ROE – annualised (%) 8.7 Net cash (CNYm): 515.9 NTA/shr (CNY): 2.77 Interest cover (x): 7.3

Historical Chart

Performance: 52-week High/Low HKD2.55/HKD1.13 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 24.0 13.9 50.6 95.1 90.4 Relative (%) 20.6 12.6 39.5 91.6 87.9

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PRICE PRICE REL. TO HANG SENG INDEX

Source: Bloomberg


Sinotrans Limited

With the exception of its shipping agency, Sinotrans’ other businesses, including freight forwarding, storage/warehouse and express, should continue to log healthy growth. We expect freight forwarding volume to grow 5-8% in FY14 and storage/warehousing throughput to increase by 5% next year. Sinotrans is actively exploring investment opportunities in the storage/warehouse business and has earmarked more than one-third of its capex for investment in this division. We also forecast an 11% rise in the contribution from its DHL-Sinotrans joint venture next year, thanks to continued growth in speed delivery demand and its number one position in the market with a 35% share.

As for the shipping agency business, we believe competition and the commoditized service will put further pressure on unit price, which we have factored in a 3% YoY decline in FY14. However, with the solid growth in other divisions, we envisage shipping agency profit to account for just 10% of the total next year, hence the impact on the bottom line is getting less and less significant.

We derive our target price based on a 12-month forward sum-of-the-parts value of HKD3.27. At our target price, the stock will trade on 10.7x PER for FY14F, which are still inexpensive relative to the global logistics peers which sit on an average of 17.5x PER. We believe the potential injection of logistics assets from the parent company may serve as an added catalyst to the share price. These assets are logistics operations located inland provinces and specialist logistics subsidiaries. These subsidiaries include vehicle and rail logistics as well as overseas logistics joint ventures. Management guided that the scale is smaller than the existing operations of Sinotrans but profitability is reasonably good. Given its low gearing, we think Sinotrans can comfortably finance these acquisitions without the need to raise funds from the equity market.

The key risks for our earnings, target price and recommendation are: 1.) weaker-than-expected global trade growth; 2.) sharp rise in fuel costs; 3.) further significant margin pressure on the freight forwarding and shipping agency businesses; and 4.) expensive asset acquisition from parent company.

Figure 59: Reported earnings and operating margin

Source: Company data, Maybank Kim Eng

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should contribute steady growth.

Sinotrans is deeply undervalued when compared with global logistics peers, in our view.

We see earnings growth supported by steady margin

expansion as marine transportation turns around.


Sinotrans Limited

Figure 60: Breakdown of FY14F revenue


Figure 61: Volume growth by business Volume growth 2011 2012 2013F 2014F 2015FFreight forwarding Sea freight forwarding 14.9% 3.2% 5.5% 8.0% 8.0% Air freight forwarding 3.4% 5.0% -4.5% 5.0% 7.0%Express service - JV Packages (m units) 4.5% -24.8% 7.0% 9.0% 9.0%Shipping agency Net registered tonnes 7.9% -0.1% 4.0% 3.0% 3.0%Storage and terminal services Warehouse operating volume 0.0% -1.2% 0.5% 5.0% 7.0% Terminal throughput 3.4% -2.1% -15.0% 5.0% 7.0%Marine transportation Volume (m TEUs) 16.4% 9.8% 8.0% 8.0% 8.0%Other services Trucking -4.6% 5.4% 5.0% 5.0% 5.0%Source: Company data, Maybank Kim Eng

Figure 62: Profit by segment Division (CNY m) 2011 2012 2013F 2014F 2015FFreight forwarding 674.7 568.2 678.1 747.9 825.7 Shipping agency 297.1 278.8 232.0 221.2 212.7 Express services 0.0 0.0 0.0 0.0 0.0 Marine transportation (313.7) (257.5) (57.9) 7.3 158.2 Storage and terminals 317.6 339.2 337.2 365.5 403.6 Others 6.1 (3.6) 10.3 12.7 15.4 Segment result 981.8 925.1 1,199.6 1,354.6 1,615.5 Other gains/(losses), net 70.3 (18.5) (54.3) (43.3) (34.5)Corporate expenses (185.9) (223.7) (264.8) (288.7) (309.3)Finance income, net (254.2) (196.2) (166.7) (126.3) (91.8)Associates 568.2 746.8 764.2 830.6 950.4 Pre-tax profit 1,180.1 1,233.5 1,478.0 1,726.9 2,130.4 Taxation (308.2) (322.4) (325.2) (379.9) (468.7) Profit for continued operations 871.9 911.1 1,152.8 1,347.0 1,661.7 Minority interests (229.4) (261.8) (303.6) (322.6) (356.2)Net profit 642.5 649.4 849.2 1,024.4 1,305.5 4.2% 1.1% 30.9% 20.4% 27.3%Source: Company data, Maybank Kim Eng

Freight forwarding82.8%

Shipping agency1.8%

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3.6%

Marine transportation

8.8%

Others3.1%

Turnaround of marine transportation and rise in express contributions are

earnings drivers.

We forecast volume growth of 3-9% for various business

segment of Sinotrans.

Freight forwarding is the primary driver for revenue.


Sinotrans Limited

Figure 63: Earnings breakdown for FY14F


Figure 64: Logistics peer valuation comparisons Price Market Cap. P/E P/B Div Yield Ticker Company Name Currency 12-12-2013 USD(m) 2013F 2014F 2013F 2014F 2013F 2014FUPS-US United Parcel Service Inc USD 100.95 72,257 21.2 18.4 25.9 22.4 2.5% 2.7%FDX-US Fedex Corp USD 136.34 43,171 19.4 15.4 2.2 2.0 0.5% 0.5%DPW-DE Deutsche Post AG EUR 24.895 41,396 16.5 15.0 3.0 2.7 3.0% 3.4%KNIN-CH Kuehne & Nagel Intl CHF 113.7 15,339 22.7 20.5 5.6 4.9 3.4% 3.8%CHRW-US C.H. Robinson Worldwide Inc USD 57.13 8,662 21.0 19.0 8.1 7.8 2.5% 2.7%TNTE-NL TNT Express NV EUR 6.142 4,603 30.9 17.1 1.3 1.3 1.1% 2.3%PWTN-CH Panalpina Welt AG CHF 146.5 3,912 41.0 30.9 4.5 4.1 1.3% 1.4%TOL-AU Toll Hldgs Ltd AUD 5.34 3,421 12.9 13.2 1.4 1.4 5.0% 5.2%598 HK Sinotrans Limited HKD 2.38 1,304 9.5 7.8 0.7 0.7 3.1% 3.8%Average 21.7 17.5 5.9 5.2 2.5% 2.9%Source: FactSet, Company data, Maybank Kim Eng

Figure 65: 12-month forward PER band

Source: Bloomberg, Company data, Maybank Kim Eng

Freight forwarding34.2%

Shipping agency10.1%

Express services38.0%

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Storage and terminals

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Others0.6%

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Reduction in significance in shipping agency – only 10% of

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Sinotrans Limited

Figure 66: 12-month forward PB multiple


Figure 67: Sum-of-the-parts valuation FY13F FY13F FY14F FY14F

Basis for Value Per Share % of Value Per Share % ofBusiness segment valuation Multiple (CNY m) value (CNY) total (CNY m) value (CNY) totalFreight forwarding PER 8.0x 2,582.9 0.61 24.3% 2,869.5 0.68 26.2%Express services PER 8.0x 4,183.8 0.98 39.3% 4,444.8 1.05 40.6%Shipping agency PER 5.0x 675.7 0.16 6.3% 649.1 0.15 5.9%Marine transportation P/B 0.7x 997.7 0.23 9.4% 698.4 0.16 6.4%Storage and terminals PER 8.0x 1,571.8 0.37 14.8% 1,715.8 0.40 15.7%Trucking and others PER 6.0x 35.9 0.01 0.3% 44.8 0.01 0.4%Net cash/(debt) 596.4 0.14 5.6% 515.9 0.12 4.7%Total asset value 10,644.3 2.51 100.0% 10,938.3 2.57 100.0% No. of shares outstanding 4,249.0 4,249.0 Per share value (CNY) 2.51 2.57 Per share value (HKD) 3.16 3.27 Current share price (HKD) 2.38 2.38 Premium/(Discount) % -24.6% -27.2% Source: Company data, Maybank Kim Eng

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Sinotrans Limited

INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2012 2013F 2014F 2015F

FYE Dec (CNYm) 2012 2013F 2014F 2015F Revenue 47,630.2 52,616.2 57,111.5 62,331.7 Property, plant and equipment 8,891 9,902 10,768 11,487 Freight forwarding 39,820.8 45,204.3 49,201.0 53,616.8 Investments in associates 3,348 3,730 4,145 4,620 Shipping agency 1,126.5 1,054.4 1,053.4 1,063.3 Deferred tax assets 497 497 497 497 Storage and terminal services 2,104.7 2,007.4 2,149.9 2,346.4 Investment securities 1,407 1,407 1,407 1,407 Marine transportation 4,919.4 4,781.6 5,215.8 5,914.7 Others 21 21 21 21 Other services (Trucking) 1,599.8 1,713.4 1,817.0 1,927.0 Total non-current assets 13,770 15,164 16,445 17,639 Less : Inter-segment elimination (2,089.1) (2,307.8) (2,504.9) (2,733.8) Other revenue 148.2 163.0 179.3 197.2 Inventories 53 72 78 85 Trade and bills receivables 8,019 8,649 9,388 10,246 Operating cost 46,947.3 51,735.6 56,089.0 61,059.8 Prepayments, deposits and other

i bl 1,073 1,153 1,252 1,366

Business tax and other surcharges 267.2 136.9 321.0 538.4 Bank balance and cash 6,372 3,441 3,314 1,544 Transportation and related charges 39,625.1 44,505.3 48,229.3 52,516.2 Total current assets 15,518 13,316 14,032 13,242 Depreciation and amortisation 474.7 488.5 534.5 580.6 Staff costs 2,724.7 2,961.1 3,126.0 3,300.1 Trade payable 5,687 6,054 6,572 7,172 Repairs and maintenance 193.0 220.6 251.9 278.6 Taxes payable 147 325 380 469 Fuel 1,503.1 1,331.2 1,408.9 1,491.2 Other payables and accruals 1,932 2,018 2,191 2,391 Travel and promotional expenses 371.9 383.3 416.1 454.1 Bank borrowings 2,832 47 73 73 Office and communications expenses 202.1 202.6 219.9 240.0 Others 2,715 3,166 3,391 3,652 Rental expenses 989.1 939.6 986.6 1,035.9 Total current liabilities 13,313 11,611 12,606 13,757 Other operating expenses 596.4 566.5 594.9 624.6 Capital 4,249 4,249 4,249 4,249 Operating profit 682.9 880.6 1,022.6 1,271.8 Reserves 5,986 6,580 7,297 8,211 Finance cost (196.2) (166.7) (126.3) (91.8) Proposed final dividends 127 170 205 261 Associates and jointly-controlled entities 746.8 764.2 830.6 950.4 Shareholders' funds 10,362 10,999 11,751 12,721

Profit before tax 1,233.5 1,478.0 1,726.9 2,130.4 Minority interest 2,365 2,669 2,992 3,348 Income tax expense (322.4) (325.2) (379.9) (468.7) Profit for the year 911.1 1,152.8 1,347.0 1,661.7 Borrowings 2,845 2,798 2,725 652 Non-controlling interest (261.8) (303.6) (322.6) (356.2) Deferred tax liabilities 31 31 31 31 Net profit 649.4 849.2 1,024.4 1,305.5 Provisions 198 198 198 198 Other liabilities 174 174 174 174 Revenue Growth (%) 8.4 10.5 8.5 9.1 Total non-current liabilities 3,247 3,200 3,128 1,055 Operating margin % 1.4 1.7 1.8 2.0 Effective tax rate% 66.2 22.0 22.0 22.0 RATES & RATIOS

CASH FLOW 2012 2013F 2014F 2015F FYE Dec (CNYm) 2012 2013F 2014F 2015F Op. Profit Margin (%) 1.4 1.7 1.8 2.0 Profit for the year 911 849 1,024 1,306 Net Profit Margin (%) 1.4 1.6 1.8 2.1 Interest income (84) (95) (60) (38) ROE % Ex. El (%) 6.3 7.7 8.7 10.3 Depreciation 456 449 493 537 ROA% Ex. El (%) 2.2 3.0 3.4 4.2 Change in inventories 30 (19) (6) (7) Net Margin Ex. El (%) 1.4 1.6 1.8 2.1 Change in trade, bills and other receivables (1,388) (630) (739) (858) Dividend Cover (x) 7.6 3.3 3.3 3.3 Change in trade, bills and other payables 845 367 517 601 Interest Cover (x) 5.6 6.5 7.3 8.7 Others (78) 453 48 (13) Asset Turnover (x) 0.6 0.5 0.5 0.5 Cash generated from operations 690 1,375 1,277 1,527 Asset/Debt (x) 5.2 10.0 10.9 42.6 Income tax paid (309) 0 0 0 Creditors Turn (days) 43.6 42.0 42.0 42.0 Others (191) (144) (101) (64) Inventory Turn (days) 0.4 0.5 0.5 0.5 Net Cash from OPERATING ACTIVITIES 191 1,231 1,176 1,463 Gearing (%) (6.7) (5.4) (4.4) (6.4) Property, plant and equipment (1,316) (1,500) (1,400) (1,300) Debt/EBITDA (x) 3.0 1.3 1.2 0.3 Investment in jointly-controlled entities (457) 0 0 0 Debt/ Market Cap (x) 0.6 0.3 0.3 0.1 Others 455 382 415 475 Net Cash used in INVESTING ACTIVITIES (1,319) (1,118) (985) (825) Repayment of bank loans (3,197) (2,832) (47) (73) PER SHARE DATA

New bank loans 6,976 0 0 0 2012 2013F 2014F 2015F Others (2,570) (212) (272) (2,335) Net Cash from FINANCING ACTIVITIES 1,209 (3,044) (319) (2,408) Adjusted EPS (CNY) 0.15 0.20 0.24 0.31 BVPS 2.44 2.59 2.77 2.99 Net change in Cash and Cash Equivalents 74 (2,931) (127) (1,770) EBITDA/share 0.45 0.50 0.56 0.66 Cash and bank balances 5,595 2,663 2,536 766 DPS 0.02 0.06 0.07 0.09




China Shipping Dev A Brewing Turnaround Story; Initiate BUY Domestic coal to recover. We expect domestic coal transportation to return to breakeven in FY14 after recording a loss in FY13. Annual negotiation of the domestic contract coal freight will start in December. With the current spot rate being an average of 35% higher than the FY13 contract rate, there is plenty of room for a good increase in the FY14 contract rate and we have factored in a 10% rise. Thanks to another 14 x 48,000dwt vessels added to this market, we forecast domestic coal traffic to grow 15% in FY14.

Oil transportation gaining momentum. A rise in oil export from Latin America (Venezuela and Colombia) and West Africa to Asia, hence increase in average voyage distance, will help push up VLCC demand and rates, in our view. We forecast an average of 10% increase in international oil transportation rates for CSD in FY14. As the company will take delivery of two more VLCCs (one in Nov, 2013 and another in Jan, 2014), these vessels will provide full-year volume contribution in next year, contributing to 10% growth in international oil traffic.

VLOC business to benefit from fleet expansion. International iron ore traffic is expected to be boosted by one more VLOC to be delivered. We forecast international ore traffic to increase 15% in FY14. Given a stable gross margin of 20%, we think the business will be a driver for next year’s earnings. In the long-term, CSD’s increase in exposure to LNG transportation is perfectly geared it to the trend of increasing clean energy consumption.

Initiate BUY. After hitting a trough gross margin of -1.5% in FY13F, we expect this to recover to 10.7% in FY14 and 15% in FY15. As a result, CSD is expected to achieve a profit of CNY325m in FY14, turning around from a loss of CNY1.35b in FY13F. Our target price is set at HKD7.20, based on a 0.85x FY14F PB, which is 10% discount to the 5-year average of 0.94x. This is to factor in CSD’s initial recovery of ROE in the next two years.

China Shipping Dev – Summary Earnings Table FYE Dec (CNYm) 2012 2013F 2014F 2015FRevenue 11,053.6 10,847.3 13,035.8 14,179.2EBITDA 1,651.9 1,223.9 3,088.9 4,013.8Recurring Net Profit 73.7 (1,353.1) 325.5 1,019.5Recurring Basic EPS (CNY) 0.0 (0.4) 0.1 0.3EPS growth (%) (93.0) (193.5) (124.1) 213.2DPS (CNY) 0.00 0.00 0.03 0.10 PER 208.6 (11.2) 46.3 14.8 EV/EBITDA (x) 23.5 36.7 15.6 12.4 Div Yield (%) 0.0 0.0 0.7 2.2 P/BV(x) 0.7 0.7 0.7 0.6 Gearing (%) 97.4 153.5 165.2 161.6ROE (%) 0.3 (6.1) 1.4 4.4ROA (%) 0.1 (2.2) 0.5 1.5Consensus Net Profit (1,018.0) 234.7 898.7Source: Company data, Maybank Kim Eng

Buy (initiation)



Stock Information

Description: China Shipping’s main businesses include coal, oil, dry bulk and iron ore transportation on both international and domestic markets. It is expanding into LNG transportation too. Ticker: 1138 HK Shares Issued (m): 3,405 Market Cap (USDm): 2,469 3-mth Avg Daily Turnover (USDm): 9.2 HSI: 23,218.1 Free Float (%): 53.6 Major Shareholders: % China Shipping Group 46.4 Key Indicators

ROE – annualised (%) 1.4 Net debt (CNYm): 37,163.5 NTA/shr (CNY): 6.61 Interest cover (x): 1.2 Historical Chart


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Source: Bloomberg


China Shipping Development Company Limited

CSD has a unique angle of gaining exposure to China’s clean energy development in the long term. The company currently has 10 LNG carriers on order under its various joint ventures with PetroChina, Sinopec and MOL. With delivery starting in FY15, their contribution will not be significant in the next two years. However, with an average IRR of 16%, we estimate this LNG fleet can generate earnings of up to CNY150m annually when they are fully delivered; and this will amount to as much as 20% of its average annual earnings after the global financial crisis in 2008. Moreover, this is not the end of the story as CSD is still in negotiation with gas suppliers and importers to expand this fleet. It is likely that orders for another two vessels may soon be placed. In our view, this will be an important growth driver for CSD, providing the company a stable, yet increasing stream of earnings.

We also see the potential injection of a bulk fleet from its parent China Shipping Group as a positive. CSD suggests that such fleet may amount to a capacity of 1m dwt (about 6% of CSD’s current fleet). This fleet is primarily focusing on the international markets, hence the earnings volatility is higher. However, given that the current vessel price is low, a conclusion of such acquisition will mean a cheap expansion.

Our earnings forecasts for CSD are 38% and 13% higher than FY14 and FY15 consensus forecasts, respectively. We expect its 4Q13 loss to show further sequential improvements, reaching CNY158m and representing a 36% QoQ reduction; and this should be a positive catalyst when it reports in mid-Mar, 2014. CSD is currently trading on 0.67x PB for FY14F, which is at the low-end of a 5-year range of 0.35-1.75x (5-year average of 0.94x). Its ROE is now rebounding from the trough, from –6.1% in FY13F to 1.4% in FY14F and 4.4% for FY15F. We have a target price of HKD7.20 for CSD, which is based on 0.85x FY14F PB, a 10% discount to the 5-year average.

Figure 68: Reported earnings and gross margin


-5%0%5%10%15%20%25%30%35%40%45%

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Earnings MarginCNYm

LNG transportation will be a long-term driver for CSD’s

earnings.

Potential injection of bulk fleet from parent amounting to 1m

dwt.

Earnings are forecast to recover in the next two years, from a

trough in FY13F.





Figure 70: Domestic coal spot and contract freight rates: Qinhuangdao-Guangzhou

Figure 71: Domestic coal spot and contract freight rates: Qinhuangdao-Shanghai

Source: Company data, Maybank Kim Eng Source: Company data, Maybank Kim Eng

Figure 72: Traffic assumptions


Domestic coal19.5%

International coal4.9%

Domestic oil16.8%

International oil30.3%

Domestic bulk3.7%

International bulk2.8%

Domestic ore2.2%

International ore19.8%

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Spot Contract

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b tonnenautical miles 2011 2012 2013F 2014F 2015FCoal transportation 66.3 70.8 74.2 84.4 88.6 % Change 20.9% 6.8% 4.9% 7.0% 5.0% Domestic 52.1 51.7 56.1 64.5 67.7 % Change 3.3% -0.9% 8.5% 15.0% 5.0% International 14.1 19.1 18.1 19.9 20.9 % Change 223.3% 35.0% -5.0% 10.0% 5.0% Oil transportation 187.3 198.3 195.6 214.3 225.0 % Change 16.5% 5.9% -1.4% 9.6% 5.0% Domestic 25.5 17.8 16.9 17.8 18.7 % Change -4.9% -30.1% -5.0% 5.0% 5.0% International 161.8 180.4 178.6 196.5 206.3 % Change 20.8% 11.5% -1.0% 10.0% 5.0% Iron ore transportation 56.1 92.8 123.6 141.8 148.9 % Change 141.9% 65.6% 33.2% 14.7% 5.0% Domestic 6.7 6.4 6.9 7.5 7.9 % Change 17.2% -5.6% 8.0% 10.0% 5.0% International 49.3 86.5 116.7 134.3 141.0 % Change 183.0% 75.3% 35.0% 15.0% 5.0% Dry bulk transportation 36.3 27.5 32.2 36.6 38.5 % Change 17.0% -24.0% 16.9% 13.8% 5.0% Domestic 3.9 5.4 7.9 8.7 9.1 % Change 38.4% 39.6% 45.0% 10.0% 5.0% International 32.4 22.1 24.3 28.0 29.4 % Change 14.8% -31.7% 10.0% 15.0% 5.0%

Diversified revenue mix with 42.2% coming from domestic

markets.

Recovery in coal and oil traffic in FY14F.



Figure 73: Rate assumptions


Figure 74: Crude oil imports from West Africa and Latin America

Source: Poten & Partners

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

To China and India To US

CNY/tonnenautical miles 2011 2012 2013F 2014F 2015FCoal transportation 0.059 0.038 0.034 0.038 0.039 % Change -8.4% -35.0% -11.2% 11.2% 3.4% Domestic 0.066 0.041 0.036 0.039 0.041 % Change 1.5% -37.6% -13.5% 10.0% 3.0% International 0.030 0.029 0.028 0.032 0.034 % Change -37.8% -3.2% -5.0% 15.0% 5.0% Oil transportation 0.033 0.028 0.027 0.029 0.030 % Change -12.3% -15.2% -3.1% 4.7% 3.2% Domestic 0.133 0.123 0.123 0.123 0.123 % Change 3.7% -7.5% 0.0% 0.0% 0.0% International 0.018 0.019 0.018 0.020 0.021 % Change -11.6% 7.5% -3.0% 10.0% 5.0% Iron ore transportation 0.025 0.023 0.019 0.020 0.021 % Change -25.1% -6.1% -20.1% 9.2% 4.7% Domestic 0.047 0.042 0.037 0.039 0.039 % Change -10.2% -11.2% -12.0% 5.0% 2.0% International 0.022 0.022 0.017 0.019 0.020 % Change -18.7% 0.7% -20.0% 10.0% 5.0% Dry bulk transportation 0.018 0.022 0.022 0.023 0.024 % Change -38.6% 22.0% -2.3% 7.3% 3.3% Domestic 0.057 0.058 0.053 0.056 0.057 % Change -11.8% 2.2% -8.0% 5.0% 2.0% International 0.013 0.013 0.011 0.013 0.014 % Change -48.4% -1.6% -15.0% 15.0% 5.0%

More crude oil imports from West Africa and Latin America will

underpin VLCC demand.

Rates will also record significant improvement in

coming years.



Figure 75: Major oil trade movement – 2012

Source: BP

Figure 76: Major oil trade movement – 2010

Source: BP



Figure 77: FY14F cost breakdown


Figure 78: Fleet capacity growth




Figure 80: Bulk shipping peer valuation comparisons Price Market Cap. P/E P/B Div Yield Ticker Company Name Currency 12-12-2013 USD (m) 2013F 2014F 2013F 2014F 2013F 2014F1919-HK China COSCO Holdings HKD 3.81 5,022 N/A N/A 1.2 1.4 0.0% 0.0%1138-HK China Shipping Dev HKD 5.62 2,469 N/A 46.3 0.7 0.7 0.0% 0.7%2606-TAI U-Ming Marine TWD 51.5 1,493 42.5 33.9 1.7 1.6 2.3% 2.3%2343-HK Pacific Basin Shipping HKD 5.45 1,361 37.6 13.9 1.0 1.0 1.1% 2.9%368-HK Sinotrans Shipping HKD 2.55 1,313 62.3 17.4 0.6 0.6 0.0% 2.5%PSL-BKK Precious Shipping THB 21.8 706 50.0 24.3 1.6 1.5 1.5% 2.2%TTA-BKK Thoresen Thai THB 17.6 545 N/A 22.8 0.8 0.9 0.0% 1.6%Average 48.1 26.4 1.1 1.1 0.7% 1.7%Source: FactSet, Company data, Maybank Kim Eng

Fuel costs43.7%

Port charges10.3%

Depreciation 15.5%

Repair and maintenance

3.6%

Labour 15.0%

Others9.5%

Insurance2.4%

-5%

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35%

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2007 2008 2009 2010 2011 2012 2013F 2014F 2015F

dwt Capacity (dwt) Growth

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Jan 09 Jul 09 Jan 10 Aug 10 Feb 11 Sep 11 Mar 12 Oct 12 Apr 13 Nov 13


Fuel cost is the most significant cost item for CSD.

We expect fleet capacity growth to decelerate sharply in next

two years.

Currently trading at close to trough P/B multiple.




FYE Dec (CNYm) 2012 2013F 2014F 2015F Revenue 11,053.6 10,847.3 13,035.8 14,179.2 Property, plant and equipment 46,928 51,957 54,664 55,546 Oil transportation 5,592.8 5,348.2 6,137.7 6,651.8 Investments in associates 4,020 4,419 5,102 5,859 Coal transportation 2,699.6 2,513.5 3,179.5 3,452.1 Loan receivables 110 110 110 110 Iron ore transportation 2,154.8 2,292.9 2,872.8 3,158.2 Deferred tax assets 242 242 242 242 Dry bulk transportation 606.3 692.8 845.7 917.1 Long term investments 6 6 6 6 Gross Profit (198.6) (66.4) 1,494.5 2,235.3 Total non-current assets 51,306 56,734 60,124 61,764 Other Income 663.3 236.8 218.1 203.8 Inventories 824 934 713 857 General and administrative expenses (496.6) (484.9) (527.9) (557.2) Trade and bills receivables 1,485 981 1,179 1,282 Operating profit (31.9) (314.5) 1,184.6 1,881.9 Prepayments and other receivables 756 446 536 583 Finance costs (593.2) (1,011.5) (986.1) (978.9) Equity investments 94 94 94 94 Associates and jointly controlled entities 293.7 5.4 152.1 230.1 Derivative financial instruments 0 0 0 0 Profit before tax (331.4) (1,320.6) 350.6 1,133.0 Bank balance and cash 3,286 2,943 1,460 1,296 Income tax expense 469.1 (13.3) (4.0) (90.3) Total current assets 6,555 5,177 4,125 4,186 Profit for the year 137.8 (1,333.9) 346.6 1,042.7 Non-controlling interest (64.0) (19.2) (21.1) (23.2) Trade payable 1,208 951 1,143 1,243 Net profit 73.7 (1,353.1) 325.5 1,019.5 Taxes payable 3 13 4 90 Other payables and accruals 917 743 893 971 Revenue Growth (%) (9.1) (1.9) 20.2 8.8 Bank & other borrowings 4,195 1,341 2,001 2,001 Gross margin % (1.8) (0.6) 11.5 15.8 Total current liabilities 6,323 3,048 4,041 4,306 Effective tax rate% 141.6 1.0 (2.0) (10.0) Net current assets 232 2,129 84 (119) CASH FLOW

FYE Dec (CNYm) 2012 2013F 2014F 2015F Total assets less current liabilities 51,538 58,863 60,208 61,644

Operating profit (32) (314) 1,185 1,882 Interest bearing bank & other borrowings 18,735 27,394 28,393 29,892 Interest income (64) (51) (36) (23) Convertible bonds 3,268 3,268 3,268 3,268 Depreciation 1,486 1,650 1,863 2,005 Corporate bonds 4,961 4,961 4,961 3,961 Decrease (Increase) in inventories (110) 221 (144) (75) Derivative financial instruments 13 13 13 13 Change in trade, bills and other receivables (618) 815 (288) (150) Deferred income 175 175 175 175 Change in trade, bills and other payables 696 (431) 342 179 Non-current liabilities 27,152 35,811 36,810 37,309 Others (458) 0 0 (0) Cash generated from operations 900 1,889 2,921 3,817 Minority interest 868 888 909 932 Interest received 61 51 36 23 Interest paid (744) (1,405) (1,517) (1,506) Capital and reserves 23,517 22,164 22,490 23,403 Income tax paid (9) (3) (13) (4) Share capital 3,405 3,405 3,405 3,405 Dividends received from associates 229 0 0 0 Reserves 20,113 18,760 18,979 19,667 Dividends paid (340) 0 0 (106) Proposed final dividends 0 0 106 331 Net Cash from OPERATING ACTIVITIES (804) (1,357) (1,494) (1,593) Property, plant and equipment (6,172) (6,680) (4,570) (2,887) Investment in jointly-controlled entities (456) 0 0 0 Others 243 0 0 0 RATES & RATIOS

Net Cash used in INVESTING ACTIVITIES (6,288) (6,148) (3,143) (663) 2012 2013F 2014F 2015F Convertile bonds issued 4,960 0 0 0 Repayment of bank loans (6,950) (4,195) (1,341) (2,001) Op. Profit Margin (%) (0.3) (2.9) 9.1 13.3 New bank loans 8,071 10,000 3,000 3,500 Net Profit Margin (%) 0.7 (12.5) 2.5 7.2 Others 115 0 0 (1,000) ROE % Ex. El (%) 0.3 (6.1) 1.4 4.4 Net Cash from FINANCING ACTIVITIES (93) (342) (1,483) (164) ROA% Ex. El (%) 0.1 (2.2) 0.5 1.5 Net change in Cash and Cash Equivalents 3,377 3,286 2,943 1,460 Net Margin Ex. El (%) 0.7 (12.5) 2.5 7.2 Cash and bank balances 3,286 2,943 1,460 1,296 Dividend Cover (x) N/A N/A 3.1 3.1 Interest Cover (x) (0.1) (0.3) 1.2 1.9 PER SHARE DATA Asset Turnover (x) 5.2 5.7 4.9 4.7

2012 2013F 2014F 2015F Asset/Debt (x) 2.2 1.9 1.9 1.9 Creditors Turn (days) 39.9 32.0 32.0 32.0 Adjusted EPS (CNY) 0.02 (0.40) 0.10 0.30 Inventory Turn (days) 49.0 33.0 33.0 33.0 BVPS 6.91 6.51 6.61 6.87 Gearing (%) 97.4 153.5 165.2 161.6 EBITDA/share 0.49 0.36 0.91 1.18 Debt/EBITDA (x) 15.9 26.1 10.9 8.8 DPS 0.00 0.00 0.03 0.10 Debt/ Market Cap (x) 1.5 1.8 1.9 2.0




COSCO Pacific Rising Exposure to Ports; Initiate BUY Increasing ports earnings; Initiate BUY. Following the disposal of CIMC, we expect CP to see an increase in port contribution to represent 70% of total earnings in FY14F, up from 48% in FY12. In our view, this will increase its earnings stability and improve earnings quality. We forecast earnings from ports to increase 14.8% in FY14F, thanks to a 7% throughput growth, increase in operating efficiency and a fade out of the impact of higher tax rates.

Overseas are key drivers. We think a significant portion of CP’s port earnings will be driven by overseas projects. Increase in throughput at the Piraeus Terminal (PCT) in Greece, partly by raising its market share in South Europe, will drive a 21% growth in profit contribution in FY14. The rise in liner routes calling at Antwerp Gateway will underpin the turnaround of this loss-making terminal. Overseas earnings will rise to account for 18% of total port earnings in FY14F, from 15% in FY12, based on our forecasts.

Expanding fleet to fuel leasing. CP’s earnings from container leasing should grow by 14% in FY14F, thanks to a 6.6% rise in box fleet and a 1ppt expansion in utilization as global box volume recovers. It is now exploring the purchase-leaseback business model for liner companies and may conclude 1-2 transactions in next year. These are highly lucrative businesses as ROE can go as high as 13-14% - we think this will be a breakthrough to the company and adds further earnings excitement to CP.

Attractive play on port sector. We initiate coverage of CP with a 12-month forward NAV-based target price of HKD13.70. On earnings terms, with a 18.8% organic growth in earnings for F14F and 15.7% for FY15F, CP is not expensive at 11.7x and 10.1x PER, respectively. The strengthened financial position should allow it to reduce finance costs and explore value-enhancing acquisitions, which we consider as positive to the share price.

COSCO Pacific – Summary Earnings Table FYE (USDm) 2012 2013F 2014F 2015FRevenue 734.8 781.4 855.6 923.6EBITDA 609.8 997.4 661.6 740.3Recurring Net Profit 280.1 281.0 333.9 386.4Recurring Basic EPS (USD) 0.10 0.10 0.12 0.14EPS growth(%) (23.75) (2.30) 18.82 15.72DPS (USD) 0.05 0.10 0.05 0.06PER 13.6 13.9 11.7 10.1 EV/EBITDA (x) 8.9 5.1 7.7 6.8 Div Yield(%) 3.6 7.2 3.4 4.0 P/BV(x) 1.0 0.9 0.9 0.8 Gearing (%) 42.3 29.4 28.8 27.2ROE (%) 8.7 16.0 7.3 8.0ROA(%) 5.0 9.0 4.6 5.4Consensus Net Profit 261.9 332.0 375.8Source: Company data, Maybank Kim Eng

Buy (initiation)


Osbert TK TANG, CFA [email protected] (86) 21 5096 8370 Tracy Liu [email protected] (86) 21 5096 8367

Stock Information

Description: COSCO Pacific’s key businesses are container leasing and operating container terminals, both in China and overseas. Ticker: 1199 HK Shares Issued (m): 2,912 Market Cap (USDm): 4,043 3-mth Avg Daily Turnover (USDm): 6.3 HSI: 23,218.1 Free Float (%): 56.8 Major Shareholders: % COSCO Group 43.2 Key Indicators

ROE – annualised (%) 7.3 Net debt (USDm): 1,313.5 NTA/shr (USD): 1.62 Interest cover (x): 3.1 Historical Chart

Performance: 52-week High/Low HKD13.32/HKD9.27 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) -1.3 -6.9 2.3 -6.3 -2.5 Relative (%) -4.6 -8.2 -8.9 -9.7 -5.0

0

20

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60

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100

120

8.0

9.0

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11.0

12.0

13.0

14.0



Source: Bloomberg


COSCO Pacific Limited

We expect profit for CP to be underpinned by the escalation of port earnings next year. The Taicang Container Terminal, which CP acquired in August this year, will provide its first full-year contribution in FY14. Meanwhile, the high-tax impact for Qingdao Qianwan and Waigaoqiao Phase I starting FY13 will be diluted in next year. We also expect many of CP’s ports to see a reduction in losses or turnaround in FY14. These include Antwerp (with additional vessel calls from liner customers like Hamburg Sud), Kao Ming Container Terminal (with no pre-acquisition costs) and Xiamen Haicang (with an increase in volume and efficiency after ramp up of initial operations).

With 30% of its throughput coming from Asia-Europe trade and 20% from transpacific, we think CP is well-positioned to capture the volume improvement driven by the recovery of developed countries. The slowdown in transshipment volume growth (from close to 20% in FY12, to high single-digit in FY13) should provide enhancement to unit revenue/TEU, in our view. Overall, we project CP’s total container throughput to grow by 7% in FY14F.

CP stands at a gearing of 29.4% for FY13 and we estimate its capex will remain manageable in the next two years, allowing it to maintain a high dividend payout ratio of 40%. Our target price of HKD13.70 is based on the 12-month forward NAV and at such target, the stock will trade on 15x FY14F PER, still not stretched relative to the 5-year range of 9-18.4x. We also consider its FY14F PB of 0.86x inexpensive when compared with an average of 1.04x in the last five years.

The key risks for our earnings, target price and recommendation are: 1.) an abrupt deceleration of global economic growth; 2.) a rapid rise in operating costs; and 3.) a decline in global container box demand.

Figure 81: Earnings breakdown for FY14F


Port - Bohai Rim14.7%

Port - Yangtze River Delta

11.8%

Port - Pearl River Delta & Southeast

Coast31.2%

Port - Overseas12.5%

Port - Others0.9%

Container Leasing29.0%

Many of CP’s ports will see a reduction in loss or turnaround,

in our view.

Lower gearing should have CP to maintain a high dividend

payout of 40%.

Ports will contribute over 70% of CP’s earnings in FY14F.



Figure 82: Container throughput performance – 10M2013 Throughput ('000 TEUs) Oct-13 Oct-12 YoY change 10M2013 10M2012 YoY changeBohai Rim 1,918.8 1,845.2 4.0% 19,910.7 18,073.3 10.2%Qingdao Qianwan 1,215.1 1,161.2 4.6% 12,704.0 11,725.2 8.3%Dalian Dayao Bay Phase II 223.0 184.2 21.1% 2,305.2 1,805.3 27.7%Tianjin Five Continents 185.0 187.0 -1.1% 1,932.4 1,832.6 5.4%Tianjin Euroasia International Terminal 150.7 167.8 -10.2% 1,507.0 1,371.1 9.9%Yingkou 145.0 145.0 0.0% 1,462.1 1,339.1 9.2%Yangtze River Delta 847.4 735.1 15.3% 7,774.0 6,828.4 13.8%Waigaoqiao Ph 1 207.2 199.1 4.1% 1,793.7 1,791.8 0.1%Ningbo Yuan Dong 250.2 208.9 19.7% 2,360.5 2,051.3 15.1%Zhangjiagang 114.2 107.7 6.0% 1,134.7 1,003.3 13.1%Yangzhou 42.2 34.1 23.8% 373.9 331.1 12.9%Taicang International Container Terminal 41.6 0.0 N/A 134.1 0.0 N/ANanjing Port Longtan Container 192.0 185.2 3.6% 1,977.0 1,650.9 19.8%Pearl River Delta & Southeast Coast 1,818.4 1,673.2 8.7% 16,761.8 15,356.9 9.1%COSCO-HIT 121.0 140.6 -13.9% 1,415.2 1,459.6 -3.0%Yantian 1,003.3 1,016.4 -1.3% 8,957.1 8,969.2 -0.1%Guangzhou Nansha II 399.1 343.2 16.3% 3,691.0 3,442.9 7.2%Xiamen Ocean Gate Container Terminal 51.9 40.0 29.8% 498.6 179.2 178.2%Quanzhou Pacific 100.5 98.0 2.6% 886.7 1,010.9 -12.3%Jinjiang Pacific Ports 33.8 35.0 -3.4% 354.0 295.2 19.9%Kao Ming Container Terminal 108.8 0.0 N/A 959.1 0.0 N/AOverseas 760.3 602.1 26.3% 6,591.7 6,050.7 8.9%Piraeus Container Terminal 249.3 177.5 40.5% 2,054.8 1,735.9 18.4%Suez Canal Container Terminal 290.7 229.9 26.4% 2,565.4 2,366.7 8.4%COSCO-PSA 88.9 93.6 -5.0% 847.0 1,050.3 -19.4%Antwerp Gateway 131.4 101.1 30.0% 1,124.5 897.8 25.3%Total 5,344.8 4,855.5 10.1% 51,038.2 46,309.3 10.2%Total for Hong Kong Terminals 121.0 140.6 -13.9% 1,415.2 1,459.6 -3.0%Total for Taiwan Terminals 108.8 0.0 N/A 959.1 0.0 N/ATotal for China Terminals 4,354.7 4,112.9 5.9% 42,072.2 38,799.0 8.4%Total for Overseas Terminals 760.3 602.1 26.3% 6,591.7 6,050.7 8.9%Source: Company data, Maybank Kim Eng

Figure 83: Box fleet growth and utilization levels


Figure 84: Breakdown of port earnings for FY14F


86%

88%

90%

92%

94%

96%

98%

0

500,000

1,000,000

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2,500,000

2009 2010 2011 2012 2013F 2014F 2015F

TEU Fleet Utilisation

Bohai Rim20.0%


Pearl River Delta & Southeast Coast

42.7%

Overseas19.7%

Growth in box fleet and rise in utilization will underpin leasing

profit growth.

Pearl River Delta and Southeast Coast will account for the lion’s

share of port earnings.



Figure 85: Throughput growth assumption YoY growth Container throughput 2011 2012 2013F 2014F 2015F 2011 2012 2013F 2014F 2015FBohai Rim 19,080,635 21,747,801 23,897,893 25,363,774 26,435,791 19.8% 14.0% 9.9% 6.1% 4.2%Qingdao Qianwan 12,426,090 14,045,503 15,206,353 16,047,244 16,548,542 17.6% 13.0% 8.3% 5.5% 3.1%Dalian Dayao Bay Phase II 1,900,204 2,216,353 2,770,441 3,102,894 3,258,039 13.9% 16.6% 25.0% 12.0% 5.0%Tianjin Five Continents 2,100,321 2,180,184 2,310,995 2,380,325 2,451,735 9.5% 3.8% 6.0% 3.0% 3.0%Yingkou 1,303,068 1,600,094 1,760,103 1,883,311 1,977,476 8.9% 22.8% 10.0% 7.0% 5.0%Tianjin Euroasia International Terminal 1,350,952 1,705,667 1,850,000 1,950,000 2,200,000 N/A N/A 8.5% 5.4% 12.8% Yangtze River Delta 7,599,938 8,219,406 9,313,833 10,269,038 10,752,659 15.3% 8.2% 13.3% 10.3% 4.7%Waigaoqiao Ph 1 2,388,156 2,151,297 2,172,810 2,194,538 2,194,538 -2.5% -9.9% 1.0% 1.0% 0.0%Ningbo Yuan Dong 2,145,653 2,402,554 2,726,899 2,945,051 3,033,402 25.9% 12.0% 13.5% 8.0% 3.0%Zhangjiagang 1,065,382 1,228,935 1,351,829 1,459,975 1,576,773 19.8% 15.4% 10.0% 8.0% 8.0%Yangzhou 400,224 401,003 449,123 494,036 533,559 32.3% 0.2% 12.0% 10.0% 8.0%Nanjing Port Longtan Container 1,600,523 2,035,617 2,381,672 2,619,839 2,803,228 28.5% 27.2% 17.0% 10.0% 7.0%Taicang Container Terminal 0 0 231,500 555,600 611,160 N/A N/A N/A 140.0% 10.0% Pearl River Delta & Southeast Coast 17,305,507 18,412,644 19,920,261 21,049,985 21,951,091 7.5% 6.4% 8.2% 5.7% 4.3%COSCO-HIT 1,625,819 1,683,748 1,641,654 1,690,904 1,741,631 5.9% 3.6% -2.5% 3.0% 3.0%Yantian 10,264,440 10,666,758 10,613,424 10,825,693 11,042,207 1.3% 3.9% -0.5% 2.0% 2.0%Guangzhou Nansha II 3,914,348 4,230,574 4,442,103 4,575,366 4,666,873 27.9% 8.1% 5.0% 3.0% 2.0%Quanzhou Pacific 1,186,799 1,201,279 1,057,126 1,109,982 1,143,281 13.0% 1.2% -12.0% 5.0% 3.0%Quanzhou Jinjiang 314,101 358,836 423,426 465,769 498,373 0.2% 14.2% 18.0% 10.0% 7.0%Xiamen Haicang 0 271,449 597,188 836,063 1,003,276 N/A N/A 120.0% 40.0% 20.0%Kao Ming Container Terminal 0 0 1,145,340 1,546,209 1,855,451 N/A N/A N/A 35.0% 20.0% Overseas 6,709,807 7,305,374 7,837,511 8,539,158 9,167,749 23.6% 8.9% 7.3% 9.0% 7.4%Piraeus Port 1,188,148 2,108,090 2,444,140 2,694,333 2,889,792 73.5% 77.4% 15.9% 10.2% 7.3%Suez Canal 3,246,467 2,863,167 3,063,589 3,216,768 3,377,607 13.6% -11.8% 7.0% 5.0% 5.0%COSCO-PSA 1,106,262 1,232,954 986,363 1,015,954 1,046,433 1.3% 11.5% -20.0% 3.0% 3.0%Antwerp Gateway 1,168,930 1,101,163 1,343,419 1,612,103 1,853,918 46.9% -5.8% 22.0% 20.0% 15.0% Total 50,695,887 55,685,225 60,969,498 65,221,955 68,307,291 15.1% 9.8% 9.5% 7.0% 4.7%Source: Company data, Maybank Kim Eng

Figure 86: Net Asset Value Basis for FY13F Per share % of FY14F Per share % ofAsset Valuation NAV (USDm) (USD) Total NAV (USDm) Value (USD) TotalContainer Fleet 1,591.3 0.57 32.7% 1,594.2 0.57 32.1% Port Operations 4,600.7 1.64 94.6% 4,683.1 1.67 94.3%CT8 East DCF 219.5 0.08 4.5% 223.4 0.08 4.5%Shanghai SCT and Zhangjiagang 10x PER 28.9 0.01 0.6% 31.2 0.01 0.6%Yantian Container Terminals DCF 707.3 0.25 14.5% 710.0 0.25 14.3%Waigaoqiao Container Terminal Phase 1 DCF 265.5 0.09 5.5% 265.5 0.09 5.3%Qingdao Qianwan Container Terminal DCF 425.4 0.15 8.7% 426.6 0.15 8.6%Qingdao Qianwan United Container Terminal DCF 154.3 0.05 3.2% 157.6 0.06 3.2%Tianjin Five Continents Int'l 5% yield 37.4 0.01 0.8% 38.8 0.01 0.8%Ningbo Beilun Phase IV DCF 174.1 0.06 3.6% 177.5 0.06 3.6%Antwerp Gateway - East Deurganckdock DCF 80.6 0.03 1.7% 82.4 0.03 1.7%Suez Canal Container Terminal DCF 182.5 0.06 3.8% 186.7 0.07 3.8%COSCO-PSA DCF 58.7 0.02 1.2% 59.3 0.02 1.2%Dalian Dayao Bay Phase II DCF 119.7 0.04 2.5% 122.3 0.04 2.5%Dalian Ro-Ro Terminal DCF 105.0 0.04 2.2% 106.8 0.04 2.2%Guangzhou Nansha Phase II DCF 368.4 0.13 7.6% 374.2 0.13 7.5%Quanzhou Pacific DCF 356.8 0.13 7.3% 357.7 0.13 7.2%Quanzhou Jinjiang DCF 75.7 0.03 1.6% 76.3 0.03 1.5%Tianjin Beigangchi Phase IB DCF 79.2 0.03 1.6% 87.5 0.03 1.8%Xiamen Haicang Container Terminal DCF 287.1 0.10 5.9% 291.5 0.10 5.9%Kao Ming Container Terminal DCF 84.5 0.03 1.7% 87.4 0.03 1.8%Piraeus Port DCF 407.7 0.15 8.4% 429.8 0.15 8.7%Nanjing Longtan DCF 106.6 0.04 2.2% 109.0 0.04 2.2%Yangzhou port DCF 77.4 0.03 1.6% 78.8 0.03 1.6%Yingkou port DCF 132.8 0.05 2.7% 135.7 0.05 2.7%Taicang port DCF 65.7 0.02 1.3% 67.2 0.02 1.4% Net debt -1,280.5 -0.47 -27.3% -1,313.5 -0.47 -26.5%Total Net Asset Value 4,911.5 1.73 100.0% 4,963.9 1.77 100.0% NAV/Share (USD) 1.75 1.77NAV/Share (HKD) 13.55 13.70Share Price (HKD) 10.76 10.76Premium/(Discount) to NAV/Share -20.6% -21.4%Source: Company data, Maybank Kim Eng



Figure 87: Port peer valuation comparison Price Market Cap. P/E P/B Div Yield Ticker Company Name Currency 12-12-2013 USD (m) 2013F 2014F 2013F 2014F 2013F 2014FDPW AE DP World USD 16.6 13,778.0 24.5 21.6 1.6 1.5 1.5% 1.6%144 HK China Merchants Holdings HKD 28.10 9,162.0 17.3 15.1 1.5 1.4 2.5% 2.8%NS8U SG Hutchison Port Hlgs USD 0.64 5,575.1 22.5 21.4 0.7 0.7 8.1% 8.4%1199 HK COSCO Pacific HKD 10.76 4,043.0 13.9 11.7 0.9 0.9 7.2% 3.4%2880 HK Dalian Port (PDA) HKD 1.87 1,757.7 9.2 8.2 0.5 0.5 4.4% 4.9%3382 HK Tianjin Port Devel HKD 1.27 1,008.6 9.9 8.6 0.9 0.9 4.0% 4.5%3378 HK Xiamen Intl Port HKD 1.11 141.3 10.3 9.1 0.6 0.5 5.1% 5.8%Average 15.4 13.7 0.9 0.9 4.7% 4.5%Source: Company data, Maybank Kim Eng

Figure 88: 12-month forward PER band


Figure 89: 12-month forward PB band


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P/B multiple is still close to 1SD below its historical average.

CP’s PER valuation is currently at the middle of its 5-year range.



INCOME STATEMENT BALANCE SHEET FYE Dec (USDm) 2012 2013F 2014F 2015F

FYE Dec (USDm) 2012 2013F 2014F 2015F Revenue 734.8 781.4 855.6 923.6 Property, plant and equipment 3,952 4,170 4,361 4,543 Container leasing 323.1 338.2 370.5 404.9 Investments in associates 2,206 1,971 2,059 2,156 Hire purchase 13.9 16.0 18.4 21.1 Investments 99 99 99 99 Container terminals 397.8 427.2 466.7 497.6 Deferred tax assets 1 1 1 1 Operating profit 227.2 249.7 304.8 349.5 Others 14 14 14 14 Net interest (68.1) (81.9) (78.3) (70.3) Total non-current assets 6,271 6,254 6,533 6,813 Exceptional items 0.0 393.4 0.0 0.0 Inventories 13 13 14 15 Associates and jointly controlled entities 223.0 185.3 178.1 195.6 Trade and bills receivables 222 257 281 304 Profit before tax 382.2 746.5 404.5 474.8 Derivative financial instruments 9 9 9 9 Income tax expense (27.9) (30.2) (45.3) (55.8) Bank balance and cash 849 1,653 1,205 881 Profit for the year 354.3 716.3 359.2 419.0 Total current assets 1,092 1,931 1,509 1,208 Non-controlling interest (12.3) (18.8) (25.3) (32.6) Net profit 342.0 697.5 333.9 386.4 Trade payable 358 321 352 380 Short term bank loan 87 87 87 87 Revenue Growth (%) 22.8 6.3 9.5 8.0 Current portion of bank borrowings 688 415 333 333 Operating margin % 30.9 32.0 35.6 37.8 Taxation 7 30 45 56 Effective tax rate% 17.5 18.0 20.0 20.0 Total current liabilities 1,141 853 817 855 Net current assets (48) 1,078 692 353 CASH FLOW Share capital 36 36 36 36

FYE Dec (USDm) 2012 2013F 2014F 2015F Reserves 3,852 4,271 4,471 4,703 Proposed final dividends 66 53 53 62 Operating profit 227 250 305 349

Shareholders funds 3,954 4,360 4,560 4,801 Depreciation 168 169 179 195 Decrease (Increase) in inventories 11 (0) (1) (1) Minority interest 263 282 307 340 Change in trade, bills and other receivables (20) (35) (24) (22) Long term liabilities 1,833 2,518 2,185 1,852 Change in trade, bills and other payables 48 (37) 30 28 Loans from non-controlling

h h ld 122 122 122 122

Others (4) 0 0 0 Deferred tax liabilities 51 51 51 51 Cash generated from operations 431 346 488 549 Interest received 5 15 19 14 RATES & RATIOS

Interest paid (96) (97) (97) (84) 2012 2013F 2014F 2015F Income tax paid (9) (7) (30) (45) Dividends received from associates 217 94 90 98 Op. Profit Margin (%) 30.9 32.0 35.6 37.8 Dividends paid (45) (292) (133) (146) Net Profit Margin (%) 46.5 89.3 39.0 41.8 Net Cash from OPERATING ACTIVITIES 504 59 337 386 ROE % Ex. El (%) 8.7 16.0 7.3 8.0 Property, plant and equipment (710) (387) (370) (377) ROA% Ex. El (%) 5.0 9.0 4.6 5.4 Investment in jointly-controlled entities (75) 720 0 0 Net Margin Ex. El (%) 46.5 38.9 39.0 41.8 Others 61 0 0 0 Dividend Cover (x) 2.5 2.5 2.5 2.5 Net Cash used in INVESTING ACTIVITIES (725) 333 (370) (377) Interest Cover (x) 2.9 2.6 3.1 4.2 Loans borrowed 1,213 1,100 0 0 Asset Turnover (x) 10.0 10.5 9.4 8.7 Repayment of bank loans (727) (688) (415) (333) Asset/Debt (x) 2.8 2.7 3.1 3.5 Others 0 0 0 0 Creditors Turn (days) 177.9 150.0 150.0 150.0 Net Cash from FINANCING ACTIVITIES 486 412 (415) (333) Inventory Turn (days) 6.3 6.0 6.0 6.0 Gearing (%) 42.3 29.4 28.8 27.2 Net change in Cash and Cash Equivalents 266 804 (448) (324) Debt/EBITDA (x) 4.3 3.0 3.9 3.1 Cash and bank balances 848 1,652 1,204 880 Debt/ Market Cap (x) 0.7 0.8 0.7 0.6 PER SHARE DATA

2012 2013F 2014F 2015F Adjusted EPS (USD) 0.10 0.10 0.12 0.14 BVPS 1.42 1.55 1.62 1.71 EBITDA/share 0.22 0.36 0.24 0.26 DPS 0.05 0.10 0.05 0.06




China Merchants Holdings Expanding Geographical Empire ; Initiate BUY

Overseas a growing driver. CM's container throughput is forecast to increase by 15.3% in FY14F on the back of an increase in overseas contribution and a stable 4.5% organic growth. The full-year contribution from Terminal Link and Colombo Container Terminal will add 10.8ppt to the throughput pace next year. We expect earnings from overseas ports to increase from just 1.7% of total in FY12 to 4.3% in FY14F, supporting CM's growth as its major ports in China mature.

Growth to accelerate in traditional areas. Following years of underperformance against its northern China peers, we expect the throughput growth for eastern and southern China ports to pick up next year given their significant exposure to a rebound in cargo demand from developed countries. We believe CM’s acquisition of an additional stake in Chiwan Container Terminal will boost operating efficiency as well and expect aggregate earnings from Pearl River and Yangtze River Deltas to increase 12.9% in FY1418.1F.

Geared towards FTZ development. China's development of Free Trade Zones will create many opportunities for CM. Through its 24.5% stake in Shanghai International Port Group (SIPG), CM can capture the increase in trade activities as stimulated by the FTZ. We also expect approval for the Guangdong FTZ soon. CM's strong foothold in the area, either through its own holding of 900,000sqm of land in Qianhaiwan or its stake in CIMC, should position it well under this government policy.

Premium in port sector. We forecast CM's ex-exceptional earnings to grow 16.4% in FY14 and 14.6% in FY15, putting the stock on 15.1x and 13.3x PER, respectively. We initiate our coverage with a BUY recommendation. Based on 12-month NAV, we derive a target price of HKD33.35 for CM. At our target price, CM will trade on 19.7x PER for FY14F, which is the highest amongst the port companies. However, we justify this multiple because of its quality port portfolio and controlling stakes in many of its port projects.

China Merchants Holdings – Summary Earnings Table FYE Dec (HKDm) 2012 2013F 2014F 2015FRevenue 11,022.1 6,158.4 7,009.4 7,912.8 EBITDA 9,141.7 8,381.8 9,456.2 10,158.3 Recurring Net Profit 2,472.6 3,653.4 4,279.0 4,905.0 Recurring Basic EPS (HKD) 0.99 1.46 1.70 1.94 EPS growth (%) (39.65) 46.78 16.39 14.63 DPS (HKD) 0.70 0.70 0.80 0.91 PER 18.3 17.3 15.1 13.3 EV/EBITDA (x) 9.9 11.7 10.4 9.6 Div Yield(%) 2.5 2.5 2.8 3.2 P/BV(x) 1.5 1.5 1.4 1.3 Gearing (%) 28.6 41.5 38.8 33.7 ROE (%) 8.4 8.5 9.3 9.9 ROA(%) 4.9 4.6 5.0 5.5 Consensus Net Profit 4,114.0 4,593.0 5,094.0 Source: Company data, Maybank Kim Eng

Buy (initiation)



Stock Information

Description: China Merchants is involved in port operations (container terminal services, bulk cargo terminal services and airport cargo handling services) and container manufacturing businesses. Ticker: 144 HK Shares Issued (m): 2,527 Market Cap (USDm): 9,162 3-mth Avg Daily Turnover (USDm): 14.4 HSI: 23,218.1 Free Float (%): 45.2 Major Shareholders: % China Merchants Group 54.8 Key Indicators

ROE – annualised (%) 9.3 Net debt (HKDm): 19,679 NTA/shr (HKD): 20.08 Interest cover (x): 5.7 Historical Chart


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Source: Bloomberg


China Merchants Holdings (International) Company Limited

Over the next three years, CM will increase its overseas throughput (based on equity-ownership) to account for 23.4% of its total in FY15F, from just 0.5% in FY12. This is thanks to the investments in Nigeria, Taiwan, Djibouti and Sri Lanka. We expect the first three projects to contribute to CM’s profit in FY14, with the latter to achieve breakeven in FY15. While near-term earnings contribution is not significant, we think this will help boost overall earnings momentum as its China ports have gradually entered into ex-growth stage.

CM will continue to look for acquisition opportunities, though we believe significant investments will be muted in the near term, partly due to its gearing of 38.8% in FY14F. It has signed a Memorandum of Understanding with Tanzania for port development and is in progress to develop a terminal in Togo. We expect no more significant capex for the existing projects, except the final HKD1.5b for Colombo in next year. As a result, we believe lightening borrowing burden will help improve CM's cash flow in the next two years.

Historically, CM has traded at a premium against its Chinese peers and we do not expect this to change in the next two years. We believe the stock's current PERs of 15.1x for FY14 and 13.3x for FY15 are not expensive, given a 5-year range of 10.8-27x and an average of 18x. We calculate a target price of HKD33.35 for CM, which is based on its 12-month forward NAV. At our target price, the stock will trade on 19.7x FY14F PER, which falls well within its five year range.

The key risks to our earnings forecasts, target price and recommendation are: 1.) weaker-than-expected global economic growth; 2.) longer-than-expected operational ramp up at overseas investments; 3.) severe price competition at its ports; and 4.) a sharp rise in port operating costs.

Figure 90: Attributable throughput breakdown by area – FY14F


Western Shenzhen25.5%

Hong Kong7.1%


Qingdao10.1%

Tianjin 1.1%

PRD (ex-Shenzhen) &

Fujian2.5%

Overseas21.4%

Overseas container throughput will account for 23.4% of total in

FY15F.

Still expect CM to trade on a premium to peers.

Western Shenzhen and Yangtze River Delta are the key

throughput contributors.



Figure 91: Throughput performance and forecasts YoY % YoY % YoY% YoY % YoY % YoY %

Container (m TEUs) FY09 FY10 Change FY11 Change FY12 Change FY13F Change FY14F Change FY15F ChangeMega SCT 3.34 3.98 19.3% 4.08 2.4% 4.52 10.8% 4.16 -8.0% 4.24 2.0% 4.37 3.0%CCT and Mawan 4.76 6.12 28.5% 5.79 -5.4% 5.31 -8.3% 5.36 1.0% 5.42 1.0% 5.53 2.0%CM Port Services and Haixing 1.33 1.59 19.5% 1.62 2.3% 1.76 8.3% 1.78 1.5% 1.84 3.0% 1.89 3.0%Western Shenzhen 9.43 11.69 24.0% 11.49 -1.7% 11.59 0.8% 11.30 -2.4% 11.49 1.7% 11.78 2.5%CKRTT 0.00 0.00 N/A 0.91 N/A 1.12 23.0% 1.20 7.0% 1.26 5.0% 1.32 5.0%PRD ex-Hong Kong 9.43 11.69 24.0% 12.40 6.1% 12.70 2.4% 12.50 -1.6% 12.75 2.0% 13.10 2.8% CM Container Services and MTL 5.77 6.16 6.8% 6.09 -1.2% 5.44 -10.6% 5.71 5.0% 5.90 3.2% 6.09 3.2%Hong Kong ports 5.77 6.16 6.8% 6.09 -1.2% 5.44 -10.6% 5.71 5.0% 5.90 3.2% 6.09 3.2% Ningbo Daxie 1.19 1.56 30.9% 1.75 12.1% 1.92 9.9% 2.08 8.5% 2.23 7.0% 2.35 5.5%SIPG 25.00 29.07 16.3% 31.74 9.2% 32.53 2.5% 33.83 4.0% 34.85 3.0% 35.89 3.0%Yangtze River Delta 26.19 30.63 16.9% 33.49 9.3% 34.45 2.9% 35.91 4.3% 37.08 3.2% 38.24 3.2% Tianjin 1.94 1.92 -1.3% 2.10 9.6% 2.18 3.8% 2.29 5.0% 2.36 3.0% 2.43 3.0%Qingdao 0.02 1.10 5710.5% 2.07 87.8% 4.30 107.5% 5.37 24.8% 6.01 12.0% 6.31 5.0%Zhanjiang 0.21 0.27 32.5% 0.32 16.1% 0.31 -1.9% 0.31 1.0% 0.33 5.0% 0.35 5.0%Zhangzhou 0.32 0.43 36.5% 0.44 2.6% 0.43 -2.7% 0.56 30.0% 0.61 10.0% 0.66 8.0%Other mainland ports 2.48 3.72 50.1% 4.93 32.4% 7.22 46.5% 8.53 18.1% 9.31 9.2% 9.75 4.7% Taiwan - Kaohsiung 0.00 0.00 N/A 0.00 N/A 0.00 N/A 1.15 N/A 1.55 35.0% 1.86 20.0%Sir Lanka - Colombo 0.00 0.00 N/A 0.00 N/A 0.00 N/A 0.10 N/A 0.80 700.0% 1.50 87.5%Nigeria - Lagos 0.00 0.06 N/A 0.38 575.0% 0.40 4.5% 0.43 10.0% 0.45 3.0% 0.46 3.0%Djibouti - Djibouti City 0.00 0.00 N/A 0.00 N/A 0.00 N/A 0.90 N/A 1.01 12.0% 1.09 8.0%Terminal Link 0.00 0.00 N/A 0.00 N/A 0.00 N/A 3.62 N/A 10.54 191.4% 11.07 5.0%Togo - Lome Container Terminal 0.00 0.00 N/A 0.00 N/A 0.00 N/A 0.00 N/A 0.00 N/A 0.20 N/AOverseas ports 0.00 0.06 N/A 0.38 575.0% 0.40 4.5% 6.20 1468.7% 14.34 131.4% 16.17 12.8% Total for CM ports 43.87 52.25 19.1% 57.29 9.6% 60.21 5.1% 68.85 14.4% 79.38 15.3% 83.35 5.0%

YoY % YoY % YoY % YoY % YoY % YoY %Bulk cargo (m tonnes) FY09 FY10 Change FY11 Change FY12 Change FY13F Change FY13F Change FY13F ChangeCM Port Services and Haixing 29.3 29.1 -0.5% 26.1 -10.4% 26.1 0.1% 28.0 7.0% 29.3 5.0% 30.8 5.0%Chiwan 8.2 8.1 -1.4% 6.5 -19.0% 6.5 0.0% 7.1 8.0% 7.4 5.0% 7.8 5.0%Dongguan 0.0 2.2 N/A 2.7 22.1% 4.2 53.2% 5.2 25.0% 5.7 10.0% 6.2 8.0%CKRTT 0.0 0.0 N/A 0.6 N/A 0.7 6.4% 0.7 1.5% 0.8 12.0% 0.8 2.0%Western Shenzhen/PRD 37.5 39.4 5.2% 36.0 -8.8% 37.5 4.2% 40.9 9.1% 43.2 5.8% 45.6 5.3% SIPG 125.4 154.0 22.8% 178.3 15.8% 184.6 3.5% 201.7 9.3% 211.7 5.0% 222.3 5.0%Zhanjiang 61.3 63.7 3.9% 73.4 15.2% 68.3 -6.9% 69.0 1.0% 72.4 5.0% 76.0 5.0%Zhangzhou 7.2 7.3 1.2% 8.5 17.1% 8.7 2.8% 9.4 8.0% 9.7 3.0% 10.0 3.0%Qingdao 0.9 16.8 1684.8% 28.4 69.1% 28.0 -1.5% 22.4 -20.0% 24.2 8.0% 25.6 6.0%Djibouti - Djibouti City 0.0 0.0 N/A 0.0 N/A 0.0 N/A 3.6 N/A 4.1 15.0% 4.6 10.0%Other mainland ports 194.8 241.7 24.1% 288.5 19.4% 289.5 0.3% 306.0 5.7% 322.2 5.3% 338.5 5.1% Total for CM ports 232.3 281.1 21.0% 324.5 15.4% 327.0 0.8% 346.9 6.1% 365.4 5.3% 384.1 5.1%Source: Company data, Maybank Kim Eng



Figure 92: 10M13 throughput performance CONTAINER (m TEUs) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 10M2013Western Shenzhen (PRD ex-HK) 1.03 0.76 0.87 0.95 1.04 0.98 0.99 0.97 0.94 0.95 9.46SCCT 0.86 0.66 0.72 0.79 0.88 0.83 0.82 0.83 0.83 0.81 8.01CMPS & Haixing 0.17 0.10 0.16 0.16 0.16 0.15 0.16 0.15 0.11 0.14 1.46 Others (PRD ex-HK) 0.11 0.05 0.13 0.10 0.12 0.10 0.10 0.10 0.09 0.10 0.99CKRTT 0.11 0.05 0.13 0.10 0.12 0.10 0.10 0.10 0.09 0.10 0.99 Hong Kong ports 0.48 0.34 0.45 0.49 0.51 0.49 0.52 0.52 0.50 0.52 4.82 Yangtze River Delta 3.07 2.10 3.06 3.01 3.16 2.97 3.18 3.13 3.09 2.97 29.72SIPG 2.92 2.01 2.88 2.83 2.94 2.76 2.98 2.95 2.90 2.81 27.97Ningbo Daxie 0.15 0.09 0.18 0.18 0.22 0.21 0.20 0.18 0.18 0.16 1.75 Other ports 0.90 0.78 0.97 0.97 0.94 1.77 1.83 1.82 1.79 1.81 13.58Tianjin 0.18 0.17 0.18 0.20 0.22 0.21 0.20 0.21 0.18 0.19 1.93Qingdao 0.50 0.38 0.51 0.50 0.45 0.42 0.45 0.44 0.42 0.41 4.46Zhanjiang 0.03 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.04 0.04 0.30Zhangzhou 0.05 0.03 0.05 0.05 0.05 0.04 0.04 0.05 0.05 0.05 0.46Taiwan - Kaohsiung 0.10 0.08 0.09 0.09 0.09 0.09 0.11 0.10 0.10 0.11 0.96SriLanka - Colombo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.01Nigeria - Lagos 0.04 0.03 0.04 0.04 0.04 0.03 0.04 0.04 0.04 0.04 0.38Djibouti - Djibouti City 0.00 0.07 0.06 0.07 0.07 0.07 0.06 0.06 0.07 0.07 0.59Terminal Link 0.00 0.00 0.00 0.00 0.00 0.89 0.90 0.89 0.90 0.90 4.48 Total for CMH ports 5.58 4.03 5.48 5.52 5.75 6.31 6.62 6.54 6.41 6.35 58.58

BULK CARGO (m tonnes) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 10M2013Western Shenzhen/PRD 3.71 2.83 3.96 3.38 3.63 3.12 2.95 3.49 3.12 4.10 34.29CMPS & Haixing 2.69 2.06 2.81 2.12 2.59 2.07 2.13 2.28 1.98 2.39 23.10Chiwan 0.62 0.41 0.65 0.73 0.52 0.69 0.45 0.65 0.52 0.83 6.06Dongguan 0.35 0.32 0.44 0.48 0.47 0.31 0.32 0.51 0.56 0.83 4.58CKRTT 0.06 0.04 0.06 0.05 0.05 0.06 0.06 0.06 0.06 0.05 0.55 Other ports 28.55 22.72 26.67 26.51 27.22 24.17 25.83 24.27 23.81 24.57 254.33SIPG 19.17 14.90 17.55 16.72 18.18 16.22 17.08 15.69 16.93 16.03 168.47Zhanjiang 5.91 4.11 5.74 6.20 5.96 5.55 6.23 6.08 4.64 5.80 56.21Zhangzhou 1.03 0.93 0.55 0.73 0.81 0.58 0.60 0.73 0.76 0.90 7.62Qingdao 2.44 2.44 2.43 2.43 1.93 1.56 1.70 1.50 1.20 1.40 19.03Djibouti - Djibouti City 0.00 0.35 0.40 0.44 0.33 0.26 0.22 0.28 0.28 0.44 3.00 Total for CMH ports 32.25 25.55 30.63 29.90 30.85 27.29 28.79 27.77 26.93 28.66 288.62Source: Company data, Maybank Kim Eng



Figure 93: 10M13 throughput growth rate YoY Change Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 10M2013Western Shenzhen (PRD ex-HK) 2.9% 1.5% -8.6% -3.9% 0.7% 0.8% -6.4% -9.6% -8.6% 9.0% -2.5%SCCT -4.2% 3.3% -10.1% -5.7% 2.7% 0.9% -9.2% -10.9% -5.4% 12.2% -3.1%CMPS & Haixing 67.2% -9.0% -1.3% 5.8% -9.1% 0.0% 10.9% -2.0% -26.2% -6.8% 0.7% Others (PRD ex-HK) 54.4% -34.2% 23.5% 5.3% 6.5% 6.6% 6.3% 5.2% 1.1% 11.1% 8.2%CKRTT 54.4% -34.2% 23.5% 5.3% 6.5% 6.6% 6.3% 5.2% 1.1% 11.1% 8.2% Hong Kong ports 0.2% -11.3% -2.4% 4.8% 8.1% 17.9% 12.7% 17.2% 6.6% 14.8% 7.0% Yangtze River Delta 10.1% -9.6% 5.8% 4.6% 5.3% 1.3% 5.5% 13.2% -0.7% 3.0% 4.0%SIPG 11.4% -8.1% 5.3% 4.0% 3.4% -0.4% 4.8% 13.3% -0.2% 3.3% 3.8%Ningbo Daxie -10.1% -33.6% 13.6% 16.1% 38.4% 31.8% 16.8% 11.9% -8.5% -1.8% 7.4% Other ports 48.4% 69.0% 71.5% 73.6% 48.6% 162.4% 166.0% 161.0% 154.7% 162.2% 116.3%Tianjin 11.4% 8.1% 2.8% 9.4% 19.2% 13.9% 0.5% 4.1% -10.2% -1.1% 5.5%Qingdao 39.7% 78.6% 69.8% 75.6% 29.5% 2.2% 13.5% 9.5% 3.5% 1.5% 27.2%Zhanjiang 23.1% -10.5% 36.4% -3.7% 4.0% 19.6% 8.0% 5.6% 30.0% 40.0% 16.1%Zhangzhou 26.8% 0.0% 44.4% 72.6% 23.7% 27.1% 26.3% 28.6% 27.8% 25.0% 29.9%Taiwan - Kaohsiung N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ASriLanka - Colombo N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ANigeria - Lagos 60.0% -17.9% 42.9% 16.7% 2.4% 3.2% 13.5% 16.2% 16.7% 21.2% 15.1%Djibouti - Djibouti City N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ATerminal Link N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Total for CM ports 13.0% 0.9% 10.1% 10.7% 9.9% 24.1% 24.6% 28.9% 18.7% 27.3% 17.2%

YoY Change Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 10M2013Western Shenzhen/PRD 14.0% -10.3% 25.1% 12.7% 12.6% 25.0% -9.4% -3.6% -6.8% 47.5% 9.5%CMPS & Haixing 9.5% -11.0% 35.9% -3.7% 29.6% 19.7% 0.9% -8.8% -11.8% 22.8% 7.2%Chiwan 7.7% -22.4% -8.8% 59.4% -17.6% 105.5% -21.3% -10.0% -2.5% 54.2% 8.2%Dongguan 77.4% 19.6% 36.3% 65.3% -13.0% -19.9% -38.5% 46.6% 10.4% 250.6% 26.9%CKRTT 71.4% -10.9% -3.3% 0.0% -5.3% 18.1% -5.1% -3.4% -4.5% -16.7% 1.0% Other mainland ports 16.6% -0.5% 4.2% 13.9% 12.3% 2.4% 8.0% 6.8% -6.3% 0.8% 5.8%SIPG 22.3% 9.0% 5.9% 10.5% 16.2% 5.3% 14.0% 9.7% 1.9% 4.1% 9.8%Zhanjiang 4.9% -31.5% -7.4% 22.2% 9.3% 7.8% 5.9% 7.7% -20.0% 7.7% 0.0%Zhangzhou 23.8% 30.4% 24.3% 10.6% 9.4% -23.8% -22.4% 43.6% 5.9% -32.0% 2.0%Qingdao 3.6% -0.4% 1.3% 0.1% -19.2% -31.7% -25.5% -34.3% -47.7% -38.2% -18.8%Djibouti - Djibouti City N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Total for CM ports 16.3% -1.7% 6.4% 13.7% 12.3% 4.6% 5.9% 5.3% -6.4% 5.6% 6.2%Source: Company data, Maybank Kim Eng

Figure 94: Monthly western Shenzhen throughput trend Figure 95: Monthly SIPG throughput trend

Source: MoT, Maybank Kim Eng Source: MoT, Maybank Kim Eng

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Figure 96: Net Asset Value Basis for FY13F Per share % of FY14F Per share % ofAsset Valuation NAV (HKDm) Value (HKD) Total NAV (HKDm) Value (HKD) TotalIndustrial manufacturing 11,082.8 4.42 13.8% 11,082.8 4.39 13.2%CIMC Market value 11,082.8 4.42 13.8% 11,082.8 4.39 13.2% Cargo handling and container terminals 84,631.2 33.75 105.5% 88,354.9 35.02 105.0%22% stake in MTL DCF 4,868.5 1.94 6.1% 4,824.4 1.91 5.7%27.5% stake in China Nanshan Development DCF 1,463.2 0.58 1.8% 1,450.3 0.57 1.7%Shekou Container Terminals (Phase 1-3) DCF 9,907.3 3.95 12.3% 9,974.5 3.95 11.9%14% stake in Tianjin Container Terminal DCF 467.7 0.19 0.6% 490.5 0.19 0.6%45% stake in Ningbo Daxie Container Terminal DCF 1,520.9 0.61 1.9% 1,531.8 0.61 1.8%50% stake in Qingdao Qianwan DCF 5,896.2 2.35 7.3% 5,950.1 2.36 7.1%60% stake in Zhangzhou port DCF 117.5 0.05 0.1% 118.6 0.05 0.1%70% stake in Mawan and 67% in Haixing Terminals DCF 4,069.5 1.62 5.1% 4,097.5 1.62 4.9%100% stake in CM Shekou Port DCF 1,951.0 0.78 2.4% 1,941.2 0.77 2.3%100% stakein China Merchants Container Services DCF 237.6 0.09 0.3% 235.8 0.09 0.3%40% stake in Zhanjiang Port Group DCF 2,873.5 1.15 3.6% 2,895.7 1.15 3.4%20% stake in Asia Airfreight Terminal 10x PER 178.2 0.07 0.2% 178.4 0.07 0.2%4.4% stake in Ningbo Port Group Market value 1,984.3 0.79 2.5% 2,000.6 0.79 2.4%24.48% stake in Shanghai International Port Group Market value 35,380.7 14.11 44.1% 35,670.7 14.14 42.4%49% stake in Ben Dinh Sao Mai Deep Seaport, Vietnam At cost 227.9 0.09 0.3% 227.9 0.09 0.3%20% stake in Chu Kong River Trade Terminal DCF 169.7 0.07 0.2% 170.8 0.07 0.2%28.5% stake in Tin Can Terminal B, Lagos, Nigeria DCF 572.1 0.23 0.7% 532.6 0.21 0.6%10% stake in Kao Ming Container Terminal DCF 682.9 0.27 0.9% 696.7 0.28 0.8%Bonded logistics and cold chain 15x PER 1,527.8 0.61 1.9% 1,604.1 0.64 1.9%85% stake in Colombo International Terminal DCF 1,557.2 0.62 1.9% 3,458.7 1.37 4.1%50% stake in Lome Container Terminal, Togo DCF 0.0 0.00 0.0% 1,142.9 0.45 1.4%23.5% stake in Port of Djibouti SA, Djibouti DCF 1,378.0 0.55 1.7% 1,435.9 0.57 1.7%49% stake in Terminal Link DCF 4,560.9 1.82 5.7% 4,686.3 1.86 5.6%34% stake in Shenzhen Chiwan Market value 3,038.7 1.21 3.8% 3,038.7 1.20 3.6% Property 4,375.0 1.74 5.5% 4,375.0 1.73 5.2%Shun Tak Centre Market value 2,575.0 1.03 3.2% 2,575.0 1.02 3.1%Qianhaiwan land parcel At cost 1,800.0 0.72 2.2% 1,800.0 0.71 2.1%

Net debt -19,861.2 -7.92 -24.8% -19,679.4 -7.80 -23.4%Total Net Asset Value 80,227.7 32.00 100.0% 84,133.3 33.35 100.0% NAV/Share 32.00 33.35Share price 28.10 28.10Premium/(Discount) to NAV/Share -12.2% -15.7%Source: Company data, Maybank Kim Eng

Figure 97: Port peer valuation comparison Price Market Cap. P/E P/B Div Yield

Ticker Company Name Currency 12-12-2013 USD (m) 2013F 2014F 2013F 2014F 2013F 2014FDPW AE DP World USD 16.6 13,778.0 24.5 21.6 1.6 1.5 1.5% 1.6%144 HK China Merchants Holdings HKD 28.10 9,162.0 17.3 15.1 1.5 1.4 2.5% 2.8%NS8U SG Hutchison Port Hlgs USD 0.64 5,575.1 22.5 21.4 0.7 0.7 8.1% 8.4%1199 HK COSCO Pacific HKD 10.76 4,043.0 13.9 11.7 0.9 0.9 7.2% 3.4%2880 HK Dalian Port (PDA) HKD 1.87 1,757.7 9.2 8.2 0.5 0.5 4.4% 4.9%3382 HK Tianjin Port Devel HKD 1.27 1,008.6 9.9 8.6 0.9 0.9 4.0% 4.5%3378 HK Xiamen Intl Port HKD 1.11 141.3 10.3 9.1 0.6 0.5 5.1% 5.8%Average 15.4 13.7 0.9 0.9 4.7% 4.5%Source: FactSet, Maybank Kim Eng

Figure 98: 12-month forward PER band Figure 99: 12-month forward PB multiple

Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng

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INCOME STATEMENT BALANCE SHEET FYE Dec (HKDm) 2012 2013F 2014F 2015F

FYE Dec (HKDm) 2012 2013F 2014F 2015F Revenue 11,022.1 6,158.4 7,009.4 7,912.8 Property, plant and equipment 29,605 31,492 33,366 34,185 Operating costs (7,297.4) (3,539.0) (4,353.7) (5,108.6) Investments in associates 33,640 42,666 43,931 45,351 Operating profit 3,724.7 2,619.4 2,655.7 2,804.2 Investments 2,092 2,092 2,092 2,092 Net interest (1,166.0) (1,006.9) (1,194.0) (1,177.3) Deferred tax assets 120 120 120 120 Exceptional items 1,347.0 410.0 410.0 410.0 Others 5,957 5,957 5,957 5,957 Associates and jointly controlled entities 2,967.0 3,420.1 4,217.6 4,732.5 Total non-current assets 71,414 82,327 85,466 87,705 Profit before tax 6,872.7 5,442.6 6,089.3 6,769.3 Income tax expense (1,163.0) (576.3) (584.3) (616.9) Inventories 89 169 192 217 Profit for the year 5,709.7 4,866.3 5,505.1 6,152.4 Properties for sale 369 369 369 369 Non-controlling interest (1,890.7) (802.9) (816.0) (837.4) Trade and bills receivables 1,400 2,531 2,881 3,252 Net profit 3,818.9 4,063.4 4,689.0 5,315.0 Bank balance and cash 4,195 2,998 5,045 4,846 Total current assets 6,053 6,066 8,486 8,684 Revenue Growth (%) 16.4 (44.1) 13.8 12.9 Operating margin % 33.8 42.5 37.9 35.4 Trade payable 1,641 3,374 3,841 4,336 Effective tax rate% 31.2 22.0 22.0 22.0 Short term bank loan 0 0 0 0 Current portion of bank borrowings 6,035 135 1,728 1,728 CASH FLOW Taxation 139 576 584 617

FYE Dec (HKDm) 2012 2013F 2014F 2015F Others 986 986 986 986 Total current liabilities 8,801 5,072 7,139 7,666 Operating profit 2,559 1,612 1,462 1,627 Depreciation 1,284 1,335 1,389 1,444 Share capital 249 249 249 249 Decrease (Increase) in inventories (383) (80) (23) (25) Reserves 44,097 46,402 49,075 52,104 Change in trade, bills and other receivables 133 (1,131) (350) (371) Proposed dividends 1,196 1,203 1,344 1,524 Change in trade, bills and other payables 763 1,733 466 495 Shareholders funds 45,542 47,854 50,668 53,877 Others 864 1,417 1,194 1,177

Cash generated from operations 5,220 4,888 4,138 4,348 Minority interest 8,140 8,943 9,759 10,596 Long term bank loans 1,355 15,220 15,492 13,765 Interest received 162 79 88 109 Bonds/Notes 9,829 7,504 7,504 7,504 Interest paid (1,440) (1,308) (1,545) (1,550) Deferred tax liabilities 1,693 1,693 1,693 1,693 Income tax paid (882) (139) (576) (584) Others 2,106 2,106 2,106 2,106 Others (518) 643 1,077 1,207 Net Cash from OPERATING ACTIVITIES 2,542 4,162 3,182 3,529 Property, plant and equipment (3,955) (3,000) (3,000) (2,000) Investment in jointly-controlled entities (353) (8,000) 0 0 Others (4,150) 0 0 0 RATES & RATIOS

Net Cash used in INVESTING ACTIVITIES (8,458) (11,000) (3,000) (2,000) 2012 2013F 2014F 2015F Drawdown of new loans 12,233 14,000 2,000 0 Repayment of bank loans (13,063) (6,035) (135) (1,728) Op. Profit Margin (%) 33.8 42.5 37.9 35.4 Others 4,147 (2,325) 0 0 Net Profit Margin (%) 34.7 66.0 66.9 67.2 Net Cash from FINANCING ACTIVITIES 3,317 5,640 1,865 (1,728) ROE % Ex. El (%) 5.4 7.6 8.4 9.1 ROA% Ex. El (%) 4.9 4.6 5.0 5.5 Net change in Cash and Cash Equivalents (2,599) (1,198) 2,047 (198) Net Margin Ex. El (%) 22.4 59.3 61.0 62.0 Cash and bank balances 4,195 2,998 5,045 4,846 Dividend Cover (x) 2.2 2.3 2.3 2.3 Interest Cover (x) 5.9 6.1 5.7 5.3 PER SHARE DATA Asset Turnover (x) 7.0 14.4 13.4 12.2

2012 2013F 2014F 2015F Asset/Debt (x) 4.5 3.9 3.8 4.2 Creditors Turn (days) 54.3 200.0 200.0 200.0 Adjusted EPS (HKD) 0.99 1.46 1.70 1.94 Inventory Turn (days) 2.9 10.0 10.0 10.0 BVPS 18.28 18.97 20.08 21.35 Gearing (%) 28.6 41.5 38.8 33.7 EBITDA/share 3.70 2.29 2.21 2.07 Debt/EBITDA (x) 1.9 2.7 2.6 2.3 DPS 0.70 0.70 0.80 0.91 Debt/ Market Cap (x) 0.2 0.3 0.4 0.3




China COSCO Between a Rock and a Hard Place; Initiate SELL

Dip back to loss; Initiate SELL. The reported bottom line of China COSCO (CCO) will return to red in FY14 as we expect losses from COSCON (its container shipping arm), will offset the recovery of its bulk shipping business. With its FY13F reported result turned around to profit due to CNY8b disposal gains, we believe CCO can successfully defend its A-share listing position. That said, we believe it does not have similar incentive and capability to engine a profitable FY14. In our view, one should only buy CCO when all shipping sectors recover together; but we believe FY14 is not such a year.

Dragged down by liner business. We forecast long-haul freight rates to be most affected by containership oversupply. CCO’s performance will be weighed down by its huge exposure to long-haul container routes (38% of FY14F revenue), and we forecast its average freight rate to be lower (-0.1% YoY) in FY14. In our view CCO should fare better than unallied shipping lines during price wars due to its membership in the CKYH Alliance, but we believe the overall environment for the liner division will be tough for next year.

Bulk shipping to revive. We believe CCO should be able to trim its bulk shipping losses in FY14. With the retirement of chartered-in vessels, its bulk fleet growth will be limited to 3.1% in FY14F with lower average charter costs. We forecast average bulk TCE to increase 14.3% in FY14F, thanks to our projection for a rebound in average BDI next year. Its exposure to the Capesize market (51% of its FY14F fleet) is well-positioned to capture better demand in China’s imported iron ore.

Valuation unattractive. We project CCO to record a loss of CNY3.65b in FY14 due to the lack of disposal gain and continued weakness in COSCON. ROE will be -16.3% for FY14F, which is difficult to justify its PB of 1.4x. The recent share price rally has not reflected COSCON’s weakness and we initiate SELL with a target price of HKD3.20, based on our estimate of its 12-month forward sum-of-the-parts value.

China COSCO – Summary Earnings Table FYE Dec (CNYm) 2012 2013F 2014F 2015FRevenue 88,329.1 70,064.6 68,595.9 77,607.4 EBITDA (1,214.8) 11,058.8 5,330.9 11,655.6 Recurring Net Profit (9,707.1) (7,236.9) (3,646.4) 1,347.7 Recurring Basic EPS (CNY) (0.95) (0.71) (0.36) 0.13 EPS growth(%) (9.66) (25.45) (49.61) (136.96)DPS (CNY) 0.00 0.00 0.00 0.00 PER (3.3) 42.1 (8.4) 22.7 EV/EBITDA (x) (72.5) 7.3 17.8 8.4 Div Yield(%) 0.0 0.0 0.0 0.0 P/BV(x) 1.2 1.2 1.4 1.3 Gearing (%) 159.8 118.3 192.7 187.5 ROE (%) (38.0) 2.8 (16.3) 5.7 ROA(%) (57.9) 4.7 (23.8) 7.5 Consensus Net Profit (4,664.0) (933.5) 2,145.0 Source: Company data, Maybank Kim Eng

Sell (initiation)



Stock Information

Description: China COSCO’s business comprises container shipping (via COSCO Container Lines, COSCON), dry bulk cargo shipping, container terminal and container leasing services. Ticker: 1919 HK Shares Issued (m): 10,216 Market Cap (USDm): 5,022 3-mth Avg Daily Turnover (USDm): 5.6 HSI: 23,218.1 Free Float (%): 48.99 Major Shareholders: % COSCO Group 52.01 Key Indicators

ROE – annualised (%) -16.3 Net debt (CNYm): 43,075.8 NTA/shr (CNY): 2.19 Interest cover (x): 0.9

Historical Chart

Performance: 52-week High/Low HKD4.84/HKD3.01 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 7.3 -2.3 21.7 2.1 0.3 Relative (%) 4.0 -3.6 10.6 -1.3 -2.2

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Source: Bloomberg


China COSCO Holdings Company Limited

CCO’s containership and bulk carrier fleets will grow by 1.9% and 3.1%, respectively in next year based on our projections. A total of 58,000TEUs of containerships, the scheduled delivery for bulk shipping will reach 0.9m dwt next year. Meanwhile, the scheduled delivery for next year will reach 0.9m dwt. Despite the mild fleet growth, CCO’s vessel capex will remain heavy with a total of CNY5b for FY14F. We believe this will continue to keep its financial position stretched with a gearing of 193% in FY14 and 188% in FY15, elevating its finance costs.

Given the adverse operating environment, CCO’s key strategy in the future is to improve its fleet efficiency through a reduction of unit fuel consumption. We forecast overall unit cost to for COSCON to come down by 2.5% in FY14, thanks to an increase in average fleet size as more post-Panamax vessels are delivered. Although this will be of some help to the cost pressure, we believe this will not totally offset lower long-haul freight rates for next year; and this will lead to a -3% operating margin in FY14.

Over the last five years, CCO has been trading on a PB range of 0.8-2.4x. Its current PB of 1.4x does not look attractive given the negative ROE for FY14F. We derived our target price of HKD3.20 based on the 12-month forward sum-of-the-parts value of the stock. At our target price, CCO will trade on a PB of 1.15x, which is at 35% discount to the five-year average (over this period, average ROE is -11%). CCO may still buy back COSCO Logistics from its parent and consider an injection of tanker business from its parent in the future, in our view. However, with projected elevated gearing levels, we think such acquisitions are not imminent. That said, even with earnings-enhancing acquisitions or injections, it may not be EPS accretive given the potential equity issue to fund such purchases.

The key risks for our earnings, target price and recommendation are: 1.) stronger-than-expected recovery in container shipping demand; 2.) significant slippage and scrapping of containerships; 3.) a sharp retreat in bunker prices; and 4.) extremely cheap acquisitions or injections in the near future.



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We expect CCO’s gearing to stay high in FY14.

We do not expect any asset injection story in the near

future.

Gross margin, though recovering, will stay low in

FY14.





Figure 102: Key assumptions – Bulk Operation day assumption 2011 2012 2013F 2014F 2015FTotal operation days 148,919 125,764 107,800 100,886 102,371% Change -5.0% -15.5% -14.3% -6.4% 1.5% Capesize 34,807 30,766 26,151 26,674 26,674 % Change -3.8% -11.6% -15.0% 2.0% 0.0% Panamax 52,362 40,458 36,412 33,499 34,169 % Change -4.4% -22.7% -10.0% -8.0% 2.0% Handymax 51,814 45,976 37,700 33,930 34,609 % Change 7.4% -11.3% -18.0% -10.0% 2.0% Handysize 9,936 8,564 7,536 6,783 6,918 % Change -43.6% -13.8% -12.0% -10.0% 2.0% Rate assumption 2011 2012 2013F 2014F 2015FTCE/day (USD) 13,844 8,355 8,679 9,924 11,462% Change -39.5% -39.6% 3.9% 14.3% 15.5% Capesize 15,152 10,731 12,019 13,822 16,171 % Change -54.9% -29.2% 12.0% 15.0% 17.0% Panamax 14,387 7,685 7,685 8,607 9,898 % Change -37.4% -46.6% 0.0% 12.0% 15.0% Handymax 12,416 7,354 7,354 8,236 9,472 % Change -32.1% -40.8% 0.0% 12.0% 15.0% Handysize 13,847 8,358 8,525 9,548 10,980 % Change 3.8% -39.6% 2.0% 12.0% 15.0%Source: Company data, Maybank Kim Eng

Figure 103: Key assumptions – Container Volume assumptions (TEUs) 2011 2012 2013F 2014F 2015FTrans-Pacific 1,604,708 1,761,817 1,779,435 1,868,407 1,999,195% Change 2.1% 9.8% 1.0% 5.0% 7.0%Asia-Europe 1,475,582 1,792,021 1,648,659 1,780,552 1,958,607% Change 14.6% 21.4% -8.0% 8.0% 10.0%Intra-Asia 1,712,177 1,984,118 2,083,324 2,187,490 2,296,865% Change 5.9% 15.9% 5.0% 5.0% 5.0%Other international 269,798 322,332 348,119 358,562 369,319% Change 33.5% 19.5% 8.0% 3.0% 3.0%PRC coastal 1,847,776 2,155,953 2,479,346 2,677,694 2,811,578% Change 20.3% 16.7% 15.0% 8.0% 5.0%Total 6,910,041 8,016,241 8,338,883 8,872,705 9,435,565% Change 11.2% 16.0% 4.0% 6.4% 6.3% Rate assumption (CNY/TEU) 2011 2012 2013F 2014F 2015FTrans-Pacific 7,621.2 8,436.4 7,930.2 7,930.2 8,723.3% Change -16.1% 10.7% -6.0% 0.0% 10.0%Asia-Europe 6,254.8 6,733.6 6,464.3 6,270.3 7,022.8% Change -33.3% 7.7% -4.0% -3.0% 12.0%Intra-Asia 3,739.1 3,688.4 3,393.3 3,563.0 3,741.1% Change -9.8% -1.4% -8.0% 5.0% 5.0%Other international 5,806.0 5,275.9 6,594.8 6,792.7 7,132.3% Change -27.8% -9.1% 25.0% 3.0% 5.0%PRC coastal 2,030.3 1,928.9 2,083.2 2,083.2 2,187.4% Change -8.4% -5.0% 8.0% 0.0% 5.0%Blended freight rate 4,801.6 5,003.3 4,712.7 4,709.9 5,147.7% Change -21.7% 4.2% -5.8% -0.1% 9.3%Source: Company data, Maybank Kim Eng

COSCON74.5%

COSCO Bulk19.5%

Container terminal3.7%

Container leasing2.2%

Container shipping will remain the primary revenue

contributor.

We forecast bulk TCE/day to rebound in FY14 on higher BDI.

Container freight rates are unlikely to improve in next year.



Figure 104: Bulk shipping cost breakdown – FY14F


Figure 105: Container shipping cost breakdown – FY14F


Figure 106: Bulk fleet capacity breakdown – FY14F


Voyage costs41.6%

Vessel costs49.3%

Other costs7.5%

Provision for onerous contracts

1.6%

Equipment and cargo costs

37.8%

Voyage costs (ex-fuel)5.0%

Fuel costs24.9%

Vessel costs15.8%

Others16.5%

Capesize50.8%

Panamax27.5%

Handy21.7%

Vessel costs in the major operating cost for bulk

shipping.

Fuel cost represents a heavy 25% of COSCON’s operating

costs.

CCO has good exposure to Capesize vessels.



Figure 107: Container fleet capacity breakdown – FY14F


Figure 108: 12-month forward P/B multiple


Figure 109: Sum-of-the-parts valuation Sum-of-the-parts valuation

PBV for shipping business (x) 0.80

12-month forward BV for shipping (HKDm) 15,641.3

Target value for shipping (HKDm) 12,528.6

Value for 43.2%-stake in COSCO Pacific (HKD) 20,394.9

Total value for China COSCO (HKDm) 32,923.5

Per share value for China COSCO (HKD) 3.20


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Container fleet growth will slow in the next two years.

Despite below average P/B, we think CCO is not attractive due

to negative ROE.

We use SOTP value to derive our target price at HKD3.20.



Figure 110: Bulk shipping peer valuation comparisons Price Market Cap. P/E P/B Div Yield Ticker Company Name Currency 12-12-2013 USD (m) 2013F 2014F 2013F 2014F 2013F 2014F1919 HK China COSCO Holdings HKD 3.81 5,022 N/A N/A 1.2 1.4 0.0% 0.0%1138 HK China Shipping Dev HKD 5.62 2,469 N/A 46.3 0.7 0.7 0.0% 0.7%2606 TAI U-Ming Marine TWD 51.5 1,493 42.5 33.9 1.7 1.6 2.3% 2.3%2343 HK Pacific Basin Shipping HKD 5.45 1,361 37.6 13.9 1.0 1.0 1.1% 2.9%368 HK Sinotrans Shipping HKD 2.55 1,313 62.3 17.4 0.6 0.6 0.0% 2.5%PSL BKK Precious Shipping THB 21.8 706 50.0 24.3 1.6 1.5 1.5% 2.2%TTA BKK Thoresen Thai THB 17.6 545 N/A 22.8 0.8 0.9 0.0% 1.6%Average 48.1 26.4 1.1 1.1 0.7% 1.7%Source: FactSet, Company data, Maybank Kim Eng

Figure 111: Container shipping peer valuation comparisons Price Market Cap. P/E P/B Div Yield Ticker Company Name Currency 12-12-2013 USD (m) 2013F 2014F 2013F 2014F 2013F 2014F1919-HK China COSCO Holdings HKD 3.81 5,022 N/A N/A 1.2 1.4 0.0% 0.0%316-HK Orient Overseas International HKD 38.95 3,144 36.5 12.3 0.7 0.7 0.7% 2.0%2866-HK CSCL HKD 2.01 3,030 N/A N/A 0.7 0.8 0.0% 0.0%N03-SES NOL SGD 1.055 2,178 N/A 27.7 0.9 0.9 0.2% 0.5%2603-TAI Evergreen Marine TWD 17.15 2,013 N/A 46.7 1.0 1.0 0.0% 0.2%2609-TAI Yang Ming Marine TWD 12.75 1,214 N/A N/A 1.3 1.3 0.0% 0.3%2615-TAI Wan Hai Lines TWD 14.85 1,113 22.5 11.9 0.9 0.9 1.4% 2.1%1308-HK SITC International HKD 3.2 1,067 10.2 8.5 1.4 1.3 5.0% 4.8%117930-KRX Hanjin Shipping KRW 5910 705 N/A N/A 0.8 1.0 0.5% 0.0%RCL-BKK Regional Container Lines THB 6.75 174 N/A 43.5 0.5 0.5 0.0% 0.7%Average 23.1 25.1 1.0 1.0 0.8% 1.1%Source: FactSet, Company data, Maybank Kim Eng




FYE Dec (CNYm) 2012 2013F 2014F 2015F Revenue 88,329.1 70,064.6 68,595.9 77,607.4 Property, plant and equipment 83,889 78,761 84,648 88,647 COSCO Container Lines 48,425.2 47,949.4 50,983.7 58,337.0 Investments in associates 16,616 14,464 18,624 19,868 Dry bulk shipping 16,026.9 13,431.1 13,563.4 14,864.9 Investments 499 521 546 577 Container terminals 2,318.0 2,364.6 2,562.3 2,731.7 Deferred tax assets 238 238 238 238 Container leasing 1,225.5 1,333.4 1,486.6 1,673.7 Others 851 851 851 851 Logistics 20,333.5 4,986.1 0.0 0.0 Total non-current assets 102,094 94,835 104,908 110,182

Gross profit/loss (2,217.7) (318.6) 3,039.9 8,886.7 Inventories 2,731 2,303 2,255 2,551 Other income (66.2) 8,899.1 (103.2) (104.5) Trade and bills receivables 13,564 10,558 10,336 11,694 General and administrative expenses (5,237.1) (4,608.7) (4,812.6) (5,026.2) Derivative financial instruments 54 54 54 54 Operating profit (7,521.0) 3,971.9 (1,875.9) 3,755.9 Bank balance and cash 46,765 47,362 35,357 55,669 Finance income 893.0 1,585.5 1,484.8 1,657.9 Total current assets 63,114 60,277 48,003 69,969 Finance costs (2,480.0) (2,274.3) (2,146.5) (2,829.9)

Associates and jointly controlled entities 1,710.7 1,287.8 1,113.6 1,244.9 Trade payable 24,213 19,196 18,793 21,262 Profit before tax (7,397.3) 4,570.9 (1,423.9) 3,828.9 Short term bank loan 5,253 5,253 5,253 5,253 Income tax expense (740.1) (740.1) (740.1) (765.8) Current portion of bank borrowings 8,865 29,635 8,317 8,317 Profit for the year (8,137.4) 3,830.8 (2,164.0) 3,063.1 Taxation 789 740 740 766 Non-controlling interest (1,421.7) (3,096.4) (1,482.4) (1,715.4) Others 1,292 1,292 1,292 1,292 Net profit (9,559.2) 734.4 (3,646.4) 1,347.7 Total current liabilities 40,413 56,117 34,396 36,891

Revenue Growth (%) 4.4 (20.7) (2.1) 13.1 Share capital 10,216 10,216 10,216 10,216 Operating margin % (8.5) 5.7 (2.7) 4.8 Reserves 14,921 15,736 12,140 13,488 Effective tax rate% (10.0) 25.0 20.0 20.0 Shareholders funds 25,137 25,952 22,356 23,704

Minority interest 16,561 19,657 21,139 22,855 CASH FLOW

FYE Dec (CNYm) 2012 2013F 2014F 2015F Long term liabilities 72,815 43,180 64,862 86,545 Bonds 6,271 6,190 6,139 6,139 Profit before taxation -7,397 4,571 -1,424 3,829 Deferred tax liabilities 2,418 2,418 2,418 2,418 Depreciation 3,703 4,214 4,608 4,997 Others 1,594 1,594 1,594 1,594 Decrease (Increase) in inventories 748 428 48 -296 Total non-current liabilities 83,097 53,381 75,013 96,696 Change in trade, bills and other receivables -2,022 3,006 221 -1,358 Change in trade, bills and other payables -374 -5,018 -402 2,469 Others -6 -121 49 568 RATES & RATIOS

Cash generated from operations -5,348 7,080 3,101 10,209 2012 2013F 2014F 2015F

Interest received 752 1,166 1,023 1,127 Op. Profit Margin (%) (8.5) 5.7 (2.7) 4.8 Income tax paid -548 -789 -740 -740 Net Profit Margin (%) (10.8) 1.0 (5.3) 1.7 Net Cash from OPERATING ACTIVITIES -5,144 7,456 3,384 10,596 ROE % Ex. El (%) (38.0) 2.8 (16.3) 5.7 ROA% Ex. El (%) (5.8) 0.5 (2.4) 0.7 Property, plant and equipment -11,394 -9,500 -10,500 -9,000 Net Margin Ex. El (%) (11.0) (10.3) (5.3) 1.7 Investment in jointly-controlled entities -477 -4,000 -3,046 0 Dividend Cover (x) N/A N/A N/A N/A Others 2,527 17,850 0 0 Interest Cover (x) 3.0 (1.7) 0.9 (1.3) Net Cash used in INVESTING ACTIVITIES -9,344 4,350 -13,546 -9,000 Asset Turnover (x) 1.9 2.2 2.2 2.3 Drawdown of new loans 34,554 0 30,000 30,000 Asset/Debt (x) 2.0 2.1 2.1 1.9 Repayment of bank loans -24,316 -8,865 -29,635 -8,317 Creditors Turn (days) 56.0 55.0 55.0 55.0 Others 3,618 -2,344 -2,207 -2,967 Inventory Turn (days) 11.3 12.0 12.0 12.0 Net Cash from FINANCING ACTIVITIES 13,856 -11,210 -1,843 18,716 Gearing (%) 159.8 118.3 192.7 187.5 Debt/EBITDA (x) (71.6) 7.1 14.7 8.6 Net change in Cash and Cash Equivalents 46,963 46,337 46,934 34,929 Debt/ Market Cap (x) 2.2 2.0 2.0 2.6 Cash and bank balances 46,337 46,934 34,929 55,241 PER SHARE DATA

2012 2013F 2014F 2015F Adjusted EPS (CNY) -0.95 -0.71 -0.36 0.13 BVPS 2.46 2.54 2.19 2.32 EBITDA/share -0.12 1.08 0.52 1.14 DPS 0.00 0.00 0.00 0.00




CSCL The Headwind Continues; Initiate SELL Another bad year in FY14F. Next year is expected to be another tough one for CSCL due to its exposure to the Asia-Europe and transpacific routes, which on aggregate accounts for 56% of revenue. We forecast its bottom line will still be in the red in next year due to a 0.8% drop in average freight rate, despite a 6.2% rise in volume. Its domestic China business is doing better (which we expect to be breakeven) but the contribution will be unable to offset the losses on international routes.

Asia-Europe under continued pressure. CSCL will start to receive its 10,000TEU vessels ordered from Hudong Zhonghua in Oct, 2013. They will be deployed on the Asia-Europe trade lane, aiming to reduce unit operating cost. Given CSCL’s estimated breakeven freight rate of US$1,000-1,200/TEU, the company will find it difficult to achieve profit on Asia-Europe trade in FY14F. The spot rate is currently low at US$987/TEU and we forecast further downside in next year. We also see the P3 Network’s potential price-based competition may hurt CSCL.

Transpacific yet to contribute profit. We do not expect transpacific trade to return to profit in the FY14/15 contract year as Asia-Europe capacity will continue to cascade into this market, putting added pressure on rates as overcapacity increases. CSCL guides that at the current spot rate of US$1,717/FEU, it is unable to cover its costs on this trade. Additionally, as half of its transpacific cargoes are lower-priced BCOs (Beneficiary Cargo Owners), it will need a recovery of the spot rate to at least US$1,800-2,000/FEU to achieve breakeven.

Sustained negative ROE. Through the partial disposal of its interest in CS Terminals, CSCL will be able to book a gain of CNY870m. Exact time for recognizing this profit, whether in FY13 or FY14 (we put it in FY13), is not yet confirmed. In our view, this will not alter its organic outlook as we forecast a 28.7% increase in loss in FY14. We initiate at SELL and peg our target price at 0.65x FY14F PB, or HKD1.63, to reflect the negative ROE trend and its current 0.8x PB is expensive. Poor 4Q13 and 1Q14 results are negative catalysts.

CSCL – Summary Earnings Table FYE Dec (CNYm) 2012 2013F 2014F 2015FRevenue 32,551.1 31,662.6 32,952.0 38,991.6 EBITDA 2,230.8 670.5 236.6 2,957.9 Recurring Net Profit 524.9 (1,494.3) (1,923.3) 764.3 Recurring Basic EPS (CNY) 0.0 (0.1) (0.2) 0.1 EPS growth(%) (119.1) (384.7) 28.7 (139.7)DPS (CNY) 0.0 0.0 0.0 0.0 PER 35.7 (12.5) (9.6) 24.2 EV/EBITDA (x) 13.4 46.0 146.5 11.6 Div Yield(%) 0.0 0.0 0.0 0.0 P/BV(x) 0.7 0.7 0.8 0.8 Gearing (%) 38.4 44.8 65.7 61.8 ROE (%) 2.0 (6.0) (8.3) 3.2 ROA(%) 1.0 (3.0) (4.1) 1.5 Consensus Net Profit (1,269.0) 261.3 1,699.0 Source: Company data, Maybank Kim Eng

Sell (initiation)



Stock Information

Description: CSCL provides services in international and domestic container marine transportation. Ticker: 2866 HK Shares Issued (m): 11,683 Market Cap (USDm): 3,030 3-mth Avg Daily Turnover (USDm): 10.5 HSI: 23,218.1 Free Float (%): 54.1 Major Shareholders: % China Shipping Group 45.9 Key Indicators

ROE – annualised (%) -8.3 Net debt (CNYm): 15,182.7 NTA/shr (CNY): 1.98 Interest cover (x): -2.7 Historical Chart

Performance: 52-week High/Low HKD2.75/HKD1.77 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 5.8 -8.2 9.8 -8.6 -9.9 Relative (%) 2.4 -9.5 -1.3 -12.1 -12.4

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Source: Bloomberg


China Shipping Container Lines Company Limited

In CSCL’s opinion, the P3 Network will initially focus on stabilizing the market freight rate, instead of engaging in price competition. As a result, its own strategy is to increase its operating efficiency and lower its unit operating cost through raising the average capacity of its fleet. However, we are concerned that members of the P3 Network will use their dominant market share and lower unit cost to push down freight rates. CSCL, as an independent liner without any membership in an Alliance, may suffer under such situation.

CSCL’s outstanding order book includes a total of five 18,400TEU containerships to be delivered starting Nov, 2014. Upon full delivery of these vessels, we estimate its average unit capacity of its operating fleet will grow by 18% to 5,089TEU. Although it does not currently intend to place any new orders, we forecast its vessels capex for FY14 will still amount to CNY3b and for FY15, CNY2b. We forecast its average fleet capacity to grow 8.6% in FY14, which is faster than the industry growth of 6.3%. However, CSCL does not plan to idle additional vessels as it is concerned about the potential loss of market share to competitors, meaning that capacity pressure on the company will remain heavy.

CSCL trades on 0.8x PB for FY14F, compared with a 5-year range of 0.42-1.41x. However, we are concerned that ROE will not record any meaningful recovery next year due to pressure on its freight rate. In the meantime, despite the disposal of CS Terminal, we forecast gearing to stay high at 66% as a result of shareholder equity erosion from losses. Based on a target PB of 0.65x, a 30% discount to its 5-year average of 0.92x, we reached a target price of HKD1.63 for CSCL.

The key risks for our earnings, target price and recommendation are: 1.) stronger-than-expected recovery in container shipping demand; 2.) significant slippage and scrapping of containerships; 3.) a sharp retreat in bunker prices; and 4.) more stabilization in freight rate after the commencement of P3 Network.



Figure 113: Key freight rate assumptions Revenue/TEU (CNY) 2011 2012 2013F 2014F 2015FTranspacific 7,091 7,919 7,523 7,373 8,258% Change -20.1% 11.7% -5.0% -2.0% 12.0%Asia-Europe 5,609 6,321 5,563 5,285 6,077% Change -36.7% 12.7% -12.0% -5.0% 15.0%Intra-Asia 3,494 3,669 3,375 3,443 3,615% Change -2.4% 5.0% -8.0% 2.0% 5.0%Others 7,155 8,636 9,068 9,249 9,711% Change -10.9% 20.7% 5.0% 2.0% 5.0%Domestic China 1,652 1,586 1,713 1,764 1,817% Change 4.9% -4.0% 8.0% 3.0% 3.0%Blended freight rate 3,589 3,909 3,820 3,788 4,129% Change -23.0% 8.9% -2.3% -0.8% 9.0%Source: Company data, Maybank Kim Eng

-40%

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0%

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(8,000)

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Earnings MarginCNYm

We worry that CSCL will be hurt by the competition from P3

Network.

No recovery of ROE in sight so cap the upside on P/B re-rating.

We forecast CSCL will continue to be in the red in FY14.

There will be further freight rate erosion in next year.



Figure 114: Key volume assumptions Volume (TEU) 2011 2012 2013F 2014F 2015FTranspacific 1,238,811 1,313,915 1,300,776 1,365,815 1,461,422% Change -12.9% 6.1% -1.0% 5.0% 7.0%Asia-Europe 1,177,546 1,367,765 1,477,186 1,595,361 1,754,897% Change -0.5% 16.2% 8.0% 8.0% 10.0%Intra-Asia 1,398,536 1,634,489 1,830,628 1,977,078 2,115,473% Change 5.3% 16.9% 12.0% 8.0% 7.0%Others 79,045 64,589 65,881 69,175 72,634% Change -8.8% -18.3% 2.0% 5.0% 5.0%Domestic China 3,544,064 3,649,670 3,284,703 3,448,938 3,793,832% Change 11.2% 3.0% -10.0% 5.0% 10.0%Total 7,438,002 8,030,428 7,959,174 8,456,367 9,198,258% Change 3.2% 8.0% -0.9% 6.2% 8.8%Source: Company data, Maybank Kim Eng

Figure 115: Breakdown of FY14F revenue Figure 116: Cost breakdown for FY14F

Source: Company data, Maybank Kim Eng Source: Company data, Maybank Kim Eng

Figure 117: Capacity growth




Transpacific30.6%

Europe/Mediterranean25.6%

Asia-Pacific20.7%

Domestic18.5%

Others4.7%

Port fees6.3%

Stevedoring costs22.2%

Container leasing

management costs8.6%

Fuel costs28.8%

Depreciation 4.2%

Vessel chartering

costs8.7%

Sub-route costs21.1%

Others0.2%

-5%

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Jan 09 Jul 09 Feb 10 Aug 10 Mar 11 Sep 11 Mar 12 Oct 12 Apr 13 Nov 13

P/B Average -1 SD +1 SD

Valuation not too expensive but we think there is still downside.

Volume growth will be primarily driven by capacity addition.

Capacity growth is faster than that for the industry.



Figure 119: Container shipping peer valuation comparisons Price Market Cap. P/E P/B Div Yield Ticker Company Name Currency 12-12-2013 USD (m) 2013F 2014F 2013F 2014F 2013F 2014F1919-HK China COSCO Holdings HKD 3.81 5,022 N/A N/A 1.2 1.4 0.0% 0.0%316-HK Orient Overseas International HKD 38.95 3,144 36.5 12.3 0.7 0.7 0.7% 2.0%2866-HK CSCL HKD 2.01 3,030 N/A N/A 0.7 0.8 0.0% 0.0%N03-SES NOL SGD 1.055 2,178 N/A 27.7 0.9 0.9 0.2% 0.5%2603-TAI Evergreen Marine TWD 17.15 2,013 N/A 46.7 1.0 1.0 0.0% 0.2%2609-TAI Yang Ming Marine TWD 12.75 1,214 N/A N/A 1.3 1.3 0.0% 0.3%2615-TAI Wan Hai Lines TWD 14.85 1,113 22.5 11.9 0.9 0.9 1.4% 2.1%1308-HK SITC International HKD 3.2 1,067 10.2 8.5 1.4 1.3 5.0% 4.8%117930-KRX Hanjin Shipping KRW 5910 705 N/A N/A 0.8 1.0 0.5% 0.0%RCL-BKK Regional Container Lines THB 6.75 174 N/A 43.5 0.5 0.5 0.0% 0.7%Average 23.1 25.1 1.0 1.0 0.8% 1.1%Source: FactSet, Company data, Maybank Kim Eng




FYE Dec (CNYm) 2012 2013F 2014F 2015F Revenue 32,551.1 31,662.6 32,952.0 38,991.6 Property, plant and equipment 35,799 37,908 39,899 40,287 International routes Investments in associates 1,624 1,709 1,872 1,966 Transpacific 10,405.3 9,786.2 10,070.0 12,067.9 Deferred tax assets 497 497 497 497 Europe/Mediterranean 8,646.2 8,217.4 8,431.0 10,665.3 Investment securities 362 362 362 362 Asia-Pacific 5,996.2 6,178.5 6,806.2 7,646.8 Total non-current assets 38,281 40,477 42,630 43,112 Others 557.8 597.4 639.8 705.4 Domestic routes 5,788.4 5,626.3 6,084.8 6,894.1 Inventories 1,238 901 928 1,010 Chartering 760.4 836.5 920.1 1,012.1 Trade and bills receivables 2,854 1,735 1,806 2,137 CS Terminal 396.7 420.4 0.0 0.0 Prepayments, deposits & other receivables 590 173 181 214 Bank balance and cash 8,832 6,168 1,775 3,214 Operating cost 32,791.8 32,875.2 33,876.2 36,882.4 Total current assets 12,924 8,803 4,508 6,361 Container and cargo costs 11,230.7 11,782.2 12,559.7 14,134.9 Vessel and voyage costs 14,985.6 13,961.8 14,175.1 14,824.2 Trade payable 4,662 5,854 6,033 6,568 Sub-route costs 6,355.8 6,929.4 7,141.4 7,923.2 Taxes payable 15 15 15 15 CS Terminal 219.6 201.8 0.0 0.0 Other payables and accruals 145 61 65 62 Bank borrowings 1,528 4,388 2,939 2,939 Gross profit (240.7) (1,212.5) (924.1) 2,109.2 Total current liabilities 6,350 10,319 9,051 9,584 Other gains/losses 1,812.1 1,312.3 454.3 183.5 General and administrative expenses (958.2) (965.7) (972.1) (1,033.3) Capital 11,683 11,683 11,683 11,683 Reserves 14,845 13,351 11,428 12,192 Operating profit 613.2 (865.9) (1,441.9) 1,259.5 Shareholders' funds 26,529 25,034 23,111 23,875 Net finance costs (549.2) (619.9) (526.3) (534.5) Associates and jointly-controlled entities 90.4 85.9 162.5 93.9 Minority interests 945 969 997 1,010 Profit before tax 154.5 (1,399.9) (1,805.8) 818.8

Long-term bank loans 15,364 10,976 12,037 13,098 Income tax expense 419.1 (70.0) (90.3) (40.9) Bonds 1,789 1,789 1,789 1,789 Profit for the year 573.6 (1,469.9) (1,896.0) 777.9 Finance lease obligations 228 193 153 116 Non-controlling interest (48.7) (24.3) (27.3) (13.6) Total non-current liabilities 17,381 12,957 13,979 15,003 Net profit 524.9 (1,494.3) (1,923.3) 764.3 Revenue Growth (%) 15.2 (2.7) 4.1 18.3 Gross margin % (0.7) (3.8) (2.8) 5.4 RATES & RATIOS

Effective tax rate% 271.3 5.0 5.0 (5.0) 2012 2013F 2014F 2015F Op. Profit Margin (%) 1.9 (2.7) (4.4) 3.2 CASH FLOW Net Profit Margin (%) 1.6 (4.7) (5.8) 2.0

FYE Dec (CNYm) 2012 2013F 2014F 2015F ROE % Ex. El (%) 2.0 (6.0) (8.3) 3.2 ROA% Ex. El (%) 1.0 (3.0) (4.1) 1.5 Pre-tax profit 154 (1,400) (1,806) 819 Net Margin Ex. El (%) 1.6 (4.7) (5.8) 2.0 Interest income 255 378 348 460 Dividend Cover (x) N/A N/A N/A N/A Depreciation 1,536 1,451 1,516 1,605 Interest Cover (x) 1.1 (1.4) (2.7) 2.4 Change in inventories (32) 337 (27) (82) Asset Turnover (x) 1.6 1.6 1.4 1.3 Change in trade, bills and other receivables (505) 1,119 (71) (331) Asset/Debt (x) 2.7 2.9 2.8 2.8 Change in trade, bills and other payables (87) 1,192 178 535 Creditors Turn (days) 55.0 55.0 55.0 55.0 Others (1,092) 20 14 12 Inventory Turn (days) 10.0 10.0 10.0 10.0 Cash generated from operations 230 3,097 153 3,017 Gearing (%) 38.4 44.8 65.7 61.8 Income tax paid (93) (70) (90) (41) Debt/EBITDA (x) 8.4 25.6 70.8 6.0 Net Cash from OPERATING ACTIVITIES 136 3,027 62 2,976 Debt/ Market Cap (x) 0.8 0.7 0.7 0.7 Property, plant and equipment (2,115) (3,560) (3,507) (1,993) Investment in jointly-controlled entities (20) 0 0 0 Others 3,527 165 97 66 Net Cash used in INVESTING ACTIVITIES 1,392 (3,395) (3,410) (1,927) Repayment of bank loans (9,930) (1,528) (4,388) (2,939) PER SHARE DATA

New bank loans 11,010 0 4,000 4,000 2012 2013F 2014F 2015F Others (846) (768) (657) (672) Net Cash from FINANCING ACTIVITIES 233 (2,296) (1,045) 390 Adjusted EPS (CNY) 0.04 (0.13) (0.16) 0.07 BVPS 2.27 2.14 1.98 2.04 Net change in Cash and Cash Equivalents 1,761 (2,664) (4,393) 1,439 EBITDA/share 0.19 0.06 0.02 0.25 Cash and bank balances 8,831 6,167 1,774 3,213 DPS 0.00 0.00 0.00 0.00




RESEARCH OFFICES

REGIONAL WONG Chew Hann, CA Regional Head, Institutional Research (603) 2297 8686 [email protected]

Alexander GARTHOFF Institutional Product Manager (852) 2268 0638 [email protected]

ONG Seng Yeow Regional Head, Retail Research (65) 6432 1453 [email protected]

ECONOMICS Suhaimi ILIAS Chief Economist Singapore | Malaysia (603) 2297 8682 [email protected]

Luz LORENZO Philippines (63) 2 849 8836 [email protected]

Tim LEELAHAPHAN Thailand (662) 658 1420 [email protected]

JUNIMANChief Economist, BII Indonesia (62) 21 29228888 ext 29682 [email protected]

Josua PARDEDE Economist / Industry Analyst, BII Indonesia (62) 21 29228888 ext 29695 [email protected]

MALAYSIA WONG CHEW HANN, CA Head of Research (603) 2297 8686 [email protected] Strategy DESMOND CH’NG, ACA (603) 2297 8680 [email protected] Banking & Finance LIAW THONG JUNG (603) 2297 8688 [email protected] Oil & Gas – Regional Shipping ONG CHEE TING, CA (603) 2297 8678 [email protected] Plantations – Regional MOHSHIN AZIZ (603) 2297 8692 [email protected] Aviation – Regional Petrochem YIN SHAO YANG, CPA (603) 2297 8916 [email protected] Gaming – Regional Media TAN CHI WEI, CFA (603) 2297 8690 [email protected] Power Telcos WONG WEI SUM, CFA (603) 2297 8679 [email protected] Property & REITs LEE YEN LING (603) 2297 8691 [email protected] Building Materials Glove producers

CHAI LI SHIN (603) 2297 8684 [email protected] Plantation Construction & Infrastructure KANG CHUN EE (603) 2297 8675 [email protected] Consumer IVAN YAP (603) 2297 8612 [email protected] Automotive LEE Cheng Hooi, Regional Chartist (603) 2297 8694 [email protected] Tee Sze Chiah, Head of Retail Research (603) 2297 6858 [email protected]

HONG KONG / CHINA Howard WONG Head of Research (852) 2268 0648 [email protected] Oil & Gas - Regional Alexander LATZER (852) 2268 0647 [email protected] Metals & Mining - Regional Jacqueline KO, CFA (852) 2268 0633 [email protected] Consumer Karen KWAN (852) 2268 0640 [email protected] HK & China Property Osbert TANG, CFA (852) 2268 0800 [email protected] Transport & Industrials Philip TSE, CFA FRM (852) 2268 0643 [email protected] HK & China Property Simon QIAN, CFA (852) 2268 0634 [email protected] Telecom & Internet Steven CHAN (852) 2268 0645 [email protected] Banking & Financials Warren LAU (852) 2268 0644 [email protected] Technology – Regional William YANG (852) 2268 0675 [email protected] Technology – Regional

INDIA Jigar SHAH Head of Research (91) 22 6623 2601 [email protected] Oil & Gas Automobile Cement Anubhav GUPTA (91) 22 6623 2605 [email protected] Metal & Mining Capital goods Property Urmil SHAH (91) 22 6623 2606 [email protected] Technology Media

SINGAPORE NG Wee Siang Head of Research (65) 6432 1467 [email protected] Banking & Finance Gregory YAP (65) 6432 1450 [email protected] SMID Caps – Regional Technology & Manufacturing Telcos Wilson LIEW (65) 6432 1454 [email protected] Property Developers ONG Kian Lin (65) 6432 1470 [email protected] S-REITs James KOH (65) 6432 1431 [email protected] Consumer - Regional YEAK Chee Keong, CFA (65) 6432 1460 [email protected] Offshore & Marine Derrick HENG (65) 6432 1446 [email protected] Transport (Land, Shipping & Aviation) Wei Bin (65) 6432 1455 [email protected] Commodity Logistics S-chips Alison FOK (65) 6432 1447 [email protected] Small & Mid Caps Construction John CHEONG (65) 6432 1461 [email protected] Small & Mid Caps Healthcare

INDONESIA Lucky ARIESANDI, CFA (62) 21 2557 1127 [email protected] Base metals Mining Oil & Gas Wholesale Pandu ANUGRAH (62) 21 2557 1137 [email protected] Automotive Heavy equipment Plantation Toll road Rahmi MARINA (62) 21 2557 1128 [email protected] Banking Multifinance Adi N. WICAKSONO (62) 21 2557 1128 [email protected] Generalist Anthony YUNUS (62) 21 2557 1139 [email protected] Cement Infrastructure Property

PHILIPPINES Luz LORENZO Head of Research (63) 2 849 8836 [email protected] Strategy Laura DY-LIACCO (63) 2 849 8840 [email protected] Utilities Conglomerates Telcos Lovell SARREAL (63) 2 849 8841 [email protected] Consumer Media Cement Rommel RODRIGO (63) 2 849 8839 [email protected] Conglomerates Property Ports/ Logistics Gaming Katherine TAN (63) 2 849 8843 [email protected] Banks Construction Ramon ADVIENTO (63) 2 849 8845 [email protected] Mining

THAILAND Sukit UDOMSIRIKUL Head of Research (66) 2658 6300 ext 5090 [email protected]

Mayuree CHOWVIKRAN (66) 2658 6300 ext 1440 [email protected] Strategy Padon Vannarat (66) 2658 6300 ext 1450 [email protected] Strategy Surachai PRAMUALCHAROENKIT (66) 2658 6300 ext 1470 [email protected] Auto Conmat Contractor Steel Suttatip PEERASUB (66) 2658 6300 ext 1430 [email protected] Media Commerce Sutthichai KUMWORACHAI (66) 2658 6300 ext 1400 [email protected] Energy Petrochem Termporn TANTIVIVAT (66) 2658 6300 ext 1520 [email protected] Property Woraphon WIROONSRI (66) 2658 6300 ext 1560 [email protected] Banking & Finance Jaroonpan WATTANAWONG (66) 2658 6300 ext 1404 [email protected] Transportation Small cap. Chatchai JINDARAT (66) 2658 6300 ext 1401 [email protected] Electronics

Institutional Research

Maria LAPIZ Head of Institutional Research Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 [email protected] Consumer / Materials

Jesada TECHAHASDIN, CFA (66) 2658 6300 ext 1394 [email protected] Financial Services

Kittisorn PRUITIPAT, CFA, FRM (66) 2658 6300 ext 1395 [email protected] Real Estate

VIETNAM Le Hong Lien, ACCA Head of Institutional Research (84) 844 55 58 88 x 8181 [email protected] Strategy Consumer Diversified Utilities Thai Quang Trung, CFA, Deputy Manager, Institutional Research (84) 844 55 58 88 x 8180 [email protected] Real Estate Construction Materials Truong Thanh Hang (84) 844 55 58 88 x 8085 [email protected] Consumer Le Nguyen Nhat Chuyen (84) 844 55 58 88 x 8082 [email protected] Oil & Gas

Nguyen Thi Ngan Tuyen Head of Retail Research (84) 844 55 58 88 x 8081 [email protected] Food and Beverage Oil & Gas Sony Tra Mi (84) 844 55 58 88 x 8084 [email protected] Pharmaceutical Trinh Thi Ngoc Diep (84) 844 55 58 88 x 8242 [email protected] Technology Utilities Construction Dang Thi Kim Thoa (84) 844 55 58 88 x 8083 [email protected] Consumer Nguyen Trung Hoa (84) 844 55 58 88 x 8088 [email protected] Steel Sugar Resources



APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

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Malaysia

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The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.

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Singapore: As of 13 December 2013, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 13 December 2013, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder

Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings

Maybank Kim Eng Research uses the following rating system:

BUY Return is expected to be above 10% in the next 12 months (excluding dividends)

HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends)

SELL Return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings

The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax



Malaysia Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194

Singapore Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003

London Maybank Kim Eng Securities (London) Ltd 6/F, 20 St. Dunstan’s Hill London EC3R 8HY, UK Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674

New York Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500

Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136

Hong Kong Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104

Indonesia PT Maybank Kim Eng Securities Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia

Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189

India Kim Eng Securities India Pvt Ltd 2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91).22.6623.2600 Fax: (91).22.6623.2604

Philippines Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738

Thailand Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)

Vietnam In association with

Maybank Kim Eng Securities JSC 1st Floor, 255 Tran Hung Dao St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 838 38 66 39

Saudi Arabia In association with

Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787

South Asia Sales Trading Kevin FOY [email protected] Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447

North Asia Sales Trading Alex TSUN [email protected] Tel: (852) 2268 0228 US Toll Free: 1 877 837 7635

www.maybank-ke.com | www.maybank-keresearch.com | www.kimeng.com.hk

china marine transport - kim eng · 12/13/2013 · source: , maybank kim eng figure 5: earnings...

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